What is the background?
As we highlighted in a previous article, information about the directors of a company is widely available to members of the public and, of course, HMRC. A quick search at Companies House will reveal the names of the statutory directors. If HMRC undertake an Employer Compliance Review they will look very closely at the Directors’ tax and National insurance (NI) position.
Typically, if they identify any mistakes HMRC will pursue the employer for the liability. However, if they identify a discrepancy in respect of the treatment to directors’ pay, benefits and expenses they could instead pursue the directors.
What is the issue?
The recent “in year” change to NI rates highlights the impact of the sometimes complex NI rules for directors.
In broad terms, directors’ (unlike employees’) NI is calculated on a cumulative basis with an annual earnings period. Alternatively, employers may calculate NI on the same basis as employees (on a non-cumulative basis), but they must undertake a reconciliation at the end of each tax year (or when a director leaves if that is before the end of the tax year).
If a reconciliation is not undertaken, mistakes in the calculation of both employees’ and employers’ NI will arise resulting in additional liabilities for the employer.
What do employers need to consider?
Employers should ensure reconciliations are undertaken. Particular attention should be paid to directors who:
- Are paid a regular salary which is below weekly/monthly NI upper limits and ad hoc bonuses; or
- Have been paid a regular salary which is over the weekly/monthly limits, but leave part way through a tax year.
How can UNW help?
Employers need to ensure they are dealing with their directors correctly, not only in respect of NI, but also in respect of tax issues (as highlighted in our May 2022 article).
Our employment tax specialists have expertise in the tax and NI treatment of directors and negotiations with HMRC. They regularly undertake reviews for clients to ensure they are compliant and are not facing an unexpected liability.
Our reviews typically proceed as follows:
- On-site meeting;
- Identification of all directors, both current and former directors (up to six years);
- Establishing the pay, benefits and expenses package for each;
- Clarification of points and quantification of potential liabilities;
- Feedback report; and
- Disclosure to HMRC if necessary.
If you would like to discuss how we can help you, or have any other employment taxes related queries, please get in touch with us at employmenttaxesteam@unw.co.uk
