HMRC corrects taxable director’s fee to £833.33 in VAT-inclusive example

HMRC’s worked example for an accountant-director now treats £833.33 of a £1,000 VAT-inclusive payment as taxable employment income. The remaining £166.67 is VATGOV. The correction replaces the previous split of £800 fees and £200 VATGOV, which also stated that only £800 was taxable employment incomeGOV.

The example concerns an accountant who is a director of XYZ Ltd and is entitled to annual fees of £1,000 as financial adviser. It expressly assumes that those fees can properly be regarded as earnings from the directorship. Within that assumption, the contract’s treatment of VAT determines the amount received and the employment-income figure.

Where the contract instead promises £1,000 plus VAT, the example remains unchanged: the director receives £1,200, comprising £1,000 fees and £200 VAT, and £1,000 is taxable employment income. The employment-income calculation therefore depends on which of those two contractual arrangements applies.

HMRC’s related guidance says that remuneration for an office can attract both VAT and employment income tax, but the earnings to which PAYE is applied should exclude the VAT element. The statutory VAT rule treats services supplied as an office-holder as supplied in the course or furtherance of a trade, profession or vocation where the person accepts the office in the course or furtherance of that activity.

A separate qualification applies to professional partnerships. Although the example still refers to Extra-Statutory Concession A37, HMRC’s linked guidance explains that the concession has been enacted. For the partnership treatment, the director must carry on a profession, the directorship must be a normal incident of that profession and partnership membership, the partnership agreement must require the payment to be accounted for to the firm, and the payment must be insubstantial compared with the total amount brought into account as receipts when calculating the firm’s profits. HMRC also expects a written undertaking that the directors’ fees will be included in full in the partnership’s gross income or receipts.

The relevant statutory provisions are section 94(4) of the Value Added Tax Act 1994 and, for the partnership income-tax treatment, section 16B of the Income Tax (Trading and Other Income) Act 2005.