How does IR35 impact NEDs and can you operate through your own limited company?
As a Non-Executive Director (NED), by very definition, you are an expert in your area. Invariably you will be asked to take on consultancy work, be that at the organisation you perform your Non-Exec duties or within another organisation. In this highly likely scenario the question of you structure yourself for both these roles will be raised.
In a NED role your pay will be subject to the usual taxes and National Insurance deductions as you will be deemed an employee for the purposes of your tax status. However, for other consultancy work you have taken previously you will, more than likely, have operated via your own limited company to take advantage of the tax efficiencies and other benefits that this affords.
Here at Simplify Accountancy some of our clients have asked us why they can’t simply run their NED income through their limited company? The reason is an acronym you will have no doubt heard of, even more so as of late; IR35! Simply put, IR35 is a tax legislation that is designed to combat tax avoidance by workers supplying their services to clients via an intermediary (such as a limited company), but who would otherwise be an employee and taxed as such if the intermediary was not used. As a result NEDs are remunerated by payroll and taxed as an employee rather than being able to operate more tax efficiently by working through their own limited company.
IR35 – why is it relevant to how a Non-Executive Director is remunerated?
As a Non-Executive Director you are classified as a “office holder” and in HMRC’s much derided CEST tool (the tool used to determine your IR35 status) one of the questions asks: “‘Is the worker or their business an office holder for the end client?’. Of course, as a NED you are classed as an “office holder” (when you look at HMRC’s broad definition of the term). Upon selecting “yes” to this, you will see the following response “This engagement should be classed as employed for tax purposes”.
Even if you were to get your client to appoint the limited company rather than engage with you personally, it is still you who is performing the duties so this appointment would be inside IR35 and the limited company should still deduct tax and National Insurance – this offsets, what some may argue, is the main benefit of working through a limited company.
Sounds pretty damning! Or is it? As previously mentioned, a lot of you NEDs out there will be fulfilling non NED consultancy work, be that for the company you sit on the board for or another organisation. Regardless of who you work for the usual IR35 tests are applicable – this is where Simplify Accountancy can help.
It is essential that your Non-Exec role and the consultancy services you perform have separate contracts in place. Bear in mind that HMRC have the power to question whether the fees that your limited company receives for consultancy work with your NED client should be fall under your NED remit and therefore reclassified as being generated for your NED work (in other words, liable for full tax and NI). A couple of points to be raised here – ensure that your working practices do not reflect that of a “disguised employee” and secondly, ensure that the work you are performing under the banner of a “consultant” is not board level work.
In conclusion, this is a complex area, one in which you will undoubtedly need to take further advice on. Working in a consultancy capacity alongside your NED work can be a tax mine field. Luckily this is an area that Simplify Accountancy has expertise in. Simplify Accountancy has partnered with Virtual Non Execs to ensure that the Non Exec community is working compliantly and tax efficiently. We will give you expert advice on how to run a compliant consultancy business separate and alongside your NED role/s – we may even be able to help you source your next NED appointment!
If you would like to chat with one of our consultants to discuss your options further and how we can help, please email your contact details, including a date and time to contact you to firstname.lastname@example.org
SimplifyAccountancy are experts in helping non-executive directors set themselves up and in advising non-executive directors on IR35 – LEARN MORE