Engaging Office Holders Off Payroll – The Pitfalls

Published 04 Jun 2024

It is commonplace for many financial services firms to engage office holders through an off payroll working arrangement, especially where duties are occasional. Here, we explore the potential pitfalls of such arrangements and how businesses can avoid significant liabilities arising on the fees they are paid.

What is an office holder?

An office holder is a person who has been appointed to fulfil a role within an organisation that is required by statute. Examples include:

Chief Executive Officer
Chief Financial Officer
Non-Executive Directors (NEDs)

Office holders are not considered to be either workers or employees, with their rights and duties instead governed by the Companies Act 2006 and the office held. They can however also be an employee where they have a contract in place that meets the criteria for one of employment.

A person who is an office holder may have some or all of the following criteria:

There is no contract or service agreement in place in relation to their appointment.
Their duties are minimal (e.g in the case of a NED they will likely only be required to periodically attend board meetings).
They are not directly remunerated in respect of their duties.
They effectively function as an independent office and their duties are not closely supervised or controlled.

Why does engaging office holders off payroll present a tax risk?

An off-payroll engagement is one where the fees paid are not processed through payroll and are instead paid gross without any PAYE or NIC being withheld. The individual can be engaged directly or through a personal service company (PSC).

HMRC insist any person who meets the definition of an office holder must have PAYE and NIC withheld on their fees by the engager for the remuneration related to their office holder duties in the same way as if they were an employee. This is a rule that many businesses often fall foul of, given the often-limited nature of the office holder’s duties (particularly NEDs), and the fact they do not hold employee status for legal purposes. This leads many engagers to believe they can be treated as self-employed and paid gross.

Can an office holder ever be treated as self-employed for tax and NIC purposes?

Any individual fulfilling the role of an office holder must be treated as if they are employed for tax purposes, with PAYE and NIC operated on all fees they are paid. The normal tests for determining an individual’s employment status (e.g. mutuality of obligation, right of substitution, control over the worker etc.) do not apply in the case of office holders.

What if the office holder is also providing consultancy services?

It is not unusual for office holders to provide separate consultancy services to their end client. Where this is the case, employment status is assessed on an engagement-by-engagement basis. Therefore, if the consultancy services are carved out into a separate contract from the office holder duties, then they can be assessed separately from the office holder duties for employment status purposes and PAYE/NIC withholding may not apply.

However, if the consultancy services form part of the same service agreement as the office holder duties, HMRC will deem them to form part of the same engagement and will insist on PAYE and NIC being operated on all fees paid. Therefore, it is critical to ensure the consultancy services are clearly documented in a separate contract to lower the risk of the two roles being conflated by HMRC where they are genuinely independent of each other.

What if the office holder is tax resident overseas?

HMRC insist that PAYE and NIC is due in respect of any office holder duties performed in the UK, even where the office holder is not UK resident. This will cover any activity where the office holder is present in the UK, such as attending board meetings. We find it is particularly common for financial services organisations to have non-resident directors in their business.

Where a non-resident office holder performs duties both in the UK and overseas, HMRC will expect their remuneration to be apportioned and PAYE and NIC operated on the portion relating to their UK duties. Financial services organisations may utilise arrangements such as a s.690 direction to ensure PAYE is only withheld on the proportion of income that relates to UK duties, or obtain an A1 certificate so the office holder is only liable for social security in the country where they carry out their substantive duties.

What if the office holder is not remunerated for their duties?

HMRC insist that office holder duties cannot be incidental, so PAYE and NIC is always due even where they are not directly remunerated by the company they hold a position for. In these circumstances, HMRC will seek to identify which entity appointed the office holder and recover PAYE and NIC from that entity accordingly.

What are the consequences of getting this wrong?

Alongside the PAYE and NIC liability that will arise on the failure to withhold, there may be other consequences such as:

Identification during a HMRC Employer Compliance Review or Business Risk Review, leading to a prompted disclosure which increases the risk of HMRC charging penalties. HMRC can look back four tax years for PAYE and six tax years for NIC (longer periods may apply in cases of careless or deliberate non-compliance), so significant liabilities can arise where the office holder has been engaged over a long period.
Material misstatement in the company’s financial statements that may impact the statutory audit.
Potential consequences for any transaction activity where the failure to withhold PAYE and NIC is identified as part of the due diligence process.

How can my business stay compliant?

As noted above, all office holders should be put on payroll, and any fees they receive should be subject to PAYE and NIC withholding from the date they are appointed.

Where a historical liability is identified, financial services firms may rectify the position and ensure further exposure is mitigated through:

Backdating previous payments made in the current tax year through payroll or submitting an Earlier Year Update (‘EYU’) for payments made in prior tax years where this is possible.
Submitting a voluntary disclosure to HMRC to settle the liability and reduce the risk of penalties being charged.

Case study example

During a recent tax audit of a banking client, it was discovered that the bank had hired an individual off payroll to engage as its interim Money Laundering Reporting Officer (MLRO), a position meeting the definition of the office holder. Management, believing this to fall within the scope of normal employment status rules, carried out an assessment using HMRC’s Check Employment Status for Tax (CEST) tool, which found the individual to be self-employed.

However, the individual’s office holder status meant that their fees should have been processed through payroll without the need to carry out a CEST assessment. This led to a material misstatement in the accounts, which put the bank at risk of being issued a qualified opinion in the audit report.

This is a common scenario for many financial services firms. To avoid any adverse impacts, it is important for these firms to recognise the need to withhold PAYE and NIC at the point of engagement or disclose any errors to HMRC on a voluntary basis where these are discovered retrospectively.

How can we help?

Where you have concerns that office holders have been engaged and paid off payroll by your business, our employment tax team can assist by:

Identifying any individuals engaged who meet the definition of an office holder
Reviewing historical payments to quantify any outstanding PAYE and NIC liability; and
Assisting with remedial actions to mitigate the size of the exposure and deliver the best outcome possible.

If this is a risk that applies to your organisation, please contact us and a member of the team will get in touch to discuss any queries you may have and advise on how best to move forward.

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