EIM02505 - Employment income: directors’ fees received by companies: exemption from charge to Income Tax under Part 2 of ITEPA: conditions to be met
Section 6(5) ITEPA 2003, Section 16B ITTOIA 2005, Section 40A CTA 2009
As shown at EIM02504, directors’ fees paid to a company may be exempt from charge to Income Tax under Part 2 of ITEPA and charged instead as receipts of a trade carried on by that company. Section 16B of the Income Tax (Trading and Other Income) Act 2005 and section 40A of the Corporation Tax Act 2009 set out the conditions that must be met before this treatment of the directors’ fees can be allowed.
The treatment can apply where:
- a company (the paying company) makes a payment to, or for the benefit of, a director in respect of the director’s employment as a director of that company
- the payment would otherwise be employment income of the director chargeable to tax under Part 2 of ITEPA
- the director was appointed by a company (the appointing company) other than the paying company
Where this is the case, the treatment can be allowed if the following conditions are met:
- the profits of the appointing company are within the charge to Income Tax
- by virtue of an agreement with the appointing company the director is required to account for the payment of the director’s fees to that company
There are also 2 further conditions regarding the appointing company (Conditions A and B), one of which must be met if the treatment is to be allowed:
- Condition A is that the appointing company had the right to appoint the director by virtue of its shareholding in, or agreement with, the paying company
- Condition B (where Condition A does not apply) is that the company is not one over which the director or any person connected with the director, either singly or jointly, has control. The persons who are connected with the director are the spouse, civil partner, parent, child, son-in-law or daughter-in-law of the director.
Where these conditions are met the payment can be treated for tax purposes as a receipt of a trade carried on by the appointing company. For details of the process that applies where such a request is received, see EIM02506.