Everald Dewar | Taxation and directorships
For taxation, most directors are office holders. An office holder and an employee are one and the same thing. Notwithstanding, the office and duties of a director are distinct from those imposed upon a person under a contract of service, that is, employment.
Therefore, a director does not have to be an employee, but very often is, and may wear both hats simultaneously.
In most privately held companies, directors are deemed employees. Whether the director has or does not have a service contract, he is an executive officer – distinguishable from other office holders such as auditors, liquidators, lawyers and nonexecutives administrators who are not part of ‘management’.
Directors invariably, as normal employee, receive emoluments, which include clothing, accommodation and other benefits. Benefits include health insurance, lunch, perquisites, vacation and sick leave with pay, etc.
In most cases, a director will be on the payroll, but can earn fees and bonuses determined at the company’s financial year end. These may not necessarily pass through the normal payroll.
Directors tend to file tax returns treating these fees as earned from self-employment. However, no matter what the label placed on it, all payments made to a director in his capacity as an officer of the company are, in effect, emoluments. And even if the company – or the director – refuses to appreciate that it is so, emoluments should be taxed in the usual way.
Fees as income
Treating fees as coming from self-employment effectively gives the company dispensation from paying the employer ’s portion of statutory contributions such as HEART Trust/NTA, NHT and Education Tax.
Where this is not regularised, it chances the wrath of a tax audit. Chastisement could be inflicted in the form of outstanding tax liabilities, penalties and interest.
However, as stated earlier, a director is not necessarily an employee. They can be seen as practising professionals or consultants whose services are provided by the individual, their own company or firm, which will receive the relevant director’s fee to the exclusion of the office holder himself.
A director in this situation will not be an employee of the first company, but will be an employee of or a self-employed principal in the professional practice, similar to that of a non-executive director.
Tax Administration Jamaica (TAJ) defines a non-executive director as “the member of the board of directors of a company who does not form part of the executive management team”.
TAJ explains in its technical notes that these directors are to be differentiated from ‘inside directors'. The distinction is that they "are members of the board who also serve or previously served as executive managers of the company (most often as corporate officers)".
We have already established that an executive director is the same as employee for all sense and purposes and, in strict obedience to the Income Tax Employment Regulations, receives emoluments as with any normal employee. A non-executive director, in this case, is seen as other self-employed office holders.
How will this affect the need for directors to be indemnified under an insurance policy taken out by the company to indemnify a director in the performance of the duties of his office?
That type of insurance is usually taken out to indemnify a director or other officers for damages that could arise from personal legal liability incurred by them in their capacity as director. The insurance can be arranged on a 'board' basis for all the directors in a given company or group. Will the non-executive director enjoy an indemnity from the company, whether he wants it or not, and what is the position of obtaining a corporate deduction for tax?
There is another component to this exposition in that all individuals, including executive and non-executive directors, pensioners and golden agers, who are in receipt of other income such as rent, will be treated as self-employed persons. Therefore, as they are also receiving emoluments from employment, they are both employed as well as self-employed.
These individuals will therefore have to pay additional statutory contributions as self-employed persons.
It should be noted that Tax Administration Jamaica designed the new tax returns for self-employed person, Form SO4, taking care to classify fees paid to non-executive directors as 'income from investment and other sources'. This is purposely designed to ensure that retired, golden agers who are earning director's fee will not have to pay statutory contributions on these fees.
- Everald Dewar is senior taxation manager at BDO Chartered Accountants in Kingston.