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Non-executive Directors and travel expenses - HMRC changing the rules

It is very common for an organisation to meet the cost of travel expenses for non-executive directors (NEDs) to attend Board meetings and, where necessary, the cost of related accommodation and subsistence too.

Whilst the NED may say that he or she is home based, HMRC are unlikely to accept that the NED’s home is a workplace. Furthermore, if all (or almost all) of the time that a NED spends working for an organisation is spent at the location at which the board meetings take place, HMRC will regard this location as a ‘permanent workplace’. Journeys between a home and a permanent workplace are ordinary commuting and the travel expenses attributable to such journeys (and any related accommodation and subsistence) are generally taxable. HMRC Booklet 490 includes an example under section 3.12.

What is changing?

Historically many public sector organisations have settled the tax due on NEDs' taxable travel and subsistence expenses by including it on their PAYE Settlement Agreement (PSA). PSAs have the advantage of being convenient but the disadvantage of being expensive; because the tax and national insurance contributions (NIC) payable by the public sector organisation under the PSA is calculated on a grossed-up basis (the effective tax rate for a 40 per cent taxpayer is touching 90 per cent).

This treatment has, however, been withdrawn by HMRC from 6 April 2019. From that date the only items that HMRC is permitted to include in the PSA for a public sector organisation must be either:

The Department of Business, Energy & Industrial Strategy (BEIS) wrote to the bodies it oversees on 30 May 2019 including this instruction:

'Any payments made to non-executives and other office holders will now have to be paid through payroll, with tax and National Insurance deducted at source. 'For cases where BEIS is responsible for paying fees and expenses, the default position is that the individual NED/office holder will pay the tax and National Insurance on any taxable expenses. 'The policy sponsor directorate may choose to cover these costs but this is a decision for them and will need to be met out their directorate budget. 'For cases where BEIS is not responsible for paying fees and expenses, individual organisations need to ensure that they are tax-compliant.'

What does this mean?

Each case of NED expenses should be closely reviewed to see if tax relief is available. If tax relief is not available, then:

As mentioned in our articles ‘Non-executive directors’ fees – how to avoid mistakes' and ‘Non-resident directors of UK companies and the tax implications’, it is also worth reiterating that fees for NED roles in the public and private sectors should generally be subject to tax and NIC through the payroll as NEDs are treated as officeholders (ie employees) for PAYE purposes.

What should organisations be doing now?

We would recommend all organisations check the position regarding NED expenses to see if the correct tax treatment has been applied. If historically the organisation has dealt with these expenses via a PSA, consideration should be given to whether this treatment can continue from 6 April 2019.

For those who have had their PSA removed, or don’t have one in place, then they should urgently make sure that any reimbursed expenses have been placed through payroll and the correct tax and NIC treatment applied.

We understand that those covered by the Department of Business (BEIS) instructions were asked to confirm they had actioned the change to their PSAs by 14 June 2019.

For those not covered by the BEIS instructions it is likely we will see more activity from HMRC in this area in the coming months.

If you have any further questions regarding to payments to non-executive directors, please contact Susan Ball or Lee Knight.

authors:lee-knight,authors:susan-ball