Inland Revenue has recently updated its published guidance regarding the GST treatment of directors' fees. The updated guidance applies from 1 April 2023 and will be relevant for both professional directors and companies that regularly pay directors a fee that is a GST inclusive amount.
Key change for professional directors
The key point made in the guidance is that many professional directors that provide only director services, and not any other professional or consulting services, may fall outside the scope of GST and should not be charging GST on their services. As a result, those directors will not be permitted to claim GST on costs incurred as part of those directorships also.
Broadly, the GST rules provide that a director should only charge GST on director services if those services are supplied as part of a director's "taxable activity". The statutory definition of "taxable activity" contains specific provisions relating to payments for directors' services and whether those services form part of a taxable activity.
The updated Inland Revenue guidance provides specifically (as opposed to the previous guidance which was silent on this point) that a person providing only director services through several directorships (ie, a professional director) does not supply those services as part of a taxable activity.
In order for the services to be supplied as part of a taxable activity, there must be some other taxable activity in relation to which the opportunity for the directorships arose (for example, if a director had a separate legal, accounting or consulting practice that gave rise to the directorships). The result is that Inland Revenue considers purely professional directors (with no other taxable activity such as a separate practice or business in relation to the directorships) as not being liable to charge GST on their director services.
Third parties, employees and partners in a partnership
The published guidance also addresses the position whereby a director contracts with a company via their own service company or where a directorship is taken up in the course of employment or as a partner in a partnership.
In the case of a service company, there are two supplies to consider for GST purposes: (1) the director providing their services to the third-party service company; and (2) the third party service company providing the director’s services to the company. The essential question in each case again being whether services are being provided in the course or furtherance of a taxable activity.
Ability to claim credit for GST on directors' fees
The revised Inland Revenue guidance also considers whether a company engaging a director is entitled to claim input tax deductions for fees paid to that director. Where a company is charged GST on directors’ fees they will usually be able to claim input tax deductions, provided the company is GST registered and a tax invoice or "taxable supply information" has been obtained.
What if an incorrect tax position has been taken?
Inland Revenue has issued an Operational Position statement for those that have historically adopted an approach that is inconsistent with the revised guidance. Professional directors that are incorrectly registered for GST are not required to retrospectively deregister but are required to deregister with effect from 30 June 2023 (or such other date as may be determined by Inland Revenue). The consequences of deregistration may include the director having to return GST on the market value of any assets that form part of their taxable activity (for example, motor vehicles).
This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.