Income Tax (Trading and Other Income) Act 2005 section 16B

Payments to company directors

Section 16B deals with how payments made by a company to a director are taxed when that director was appointed by a firm or by another company, allowing such payments to be treated as trading receipts rather than employment income.

• Where a company pays a director for services, and that director is a member of a firm or was appointed by another company, the payment can be redirected for tax purposes from employment income to a trading receipt of the firm or appointing company.
• Under Condition A (firm route), the director must carry on a profession, directorships must be a normal incident of that profession and firm membership, the partnership agreement must require the director to account for the payment to the firm, and the payment must be insubstantial compared with the firm's total receipts.
• Under Condition B (appointing company route), the appointing company's profits must be within the charge to income tax, the director must be contractually required to account for the payment to that company, and the appointing company must either have the right to appoint the director through its shareholding or agreement, or must not be controlled by the director or connected persons.
• Connected persons for control purposes are defined as the director's spouse, civil partner, parent, child, son-in-law or daughter-in-law.