If such NEDs are caught by IR35, they would be subject to income tax and both employer and employee National Insurance contributions (NICs).
The IR35 regulations now extend to companies who are unable to claim that they are a small company within the meaning of section 382 of the Companies Act 2006 and have a UK presence.
Under the new IR35 rules, the hirer company which engages the individual contractor who is also a NED and is providing services through their personal service company has to make a status determination statement (SDS) to determine whether the individual were it not for the presence of the personal service company is an employee for employment tax purposes and subject to deduction of employment taxes.
Typically, a NED's office holding responsibilities could attract employment status if their role goes beyond that of a normal office holder. This could include providing impartial advice and constructive criticism to the Board and strays into the realms of being involved in the day-to-day operation of the company. There is then the risk that the services provided would be subject to the new IR35 rules and employment taxes and NICs.
However, an individual contracting through their service company and operating consultancy services which does not carry out the day-to-day management activities of a director may be deemed to be outside the scope of the IR35 rules. The hirer company needs to take reasonable care when taking into account the various factors which determine employment status (such as control, supervision, direction and integration of the individual).
Hirer companies should be aware that even if they make a SDS which finds that the NEDs services or assignments are outside the scope of the IR35 regulations, HMRC can challenge such a decision and the hirer companies will be liable to pay any unpaid employment taxes and employer and employee NICs in respect of that NED.
Hirer companies should include provisions in any consultancy agreement with the NED to take into account any potential tax liabilities and continuously monitor changes to the arrangement to reduce the risk of facing demands from HMRC.