NIM12009 – Class 1: Calculating Class1 NICs for Directors: Fees received by other companies: No formal right to appoint a director: Control test

Regulation 27(1) & Regulation 27(4) SSCR 2001

For the purpose of regulation 27(4) SSCR 2001 the first company should not be one over which the director, or

• any person connected with the director, or
• the director and any persons connected with the director has control.

“Control” has the meaning given to it by Section 840 ICTA 1988, but any person connected with the director is included in the test. A person connected with the director is defined in the regulation as a:

• spouse
• parent
• child
• son-in-law, or
• daughter-in-law

of the director.

Control occurs where a person, or persons, can effectively decide the direction and policies of a company. Policies of the company, remuneration of directors, payment of dividends, appointments of auditors and directors are normally decided at the annual general meeting after the end of the company’s accounts year and shareholders vote on those issues. Therefore a basic form of control is the ownership of over 50% of the shares in a company.

For example if the director of the second company mentioned above owns 40% of the shares of the first company, there is no control so the fees would be excluded from Class 1 if the other conditions were satisfied.

However if the spouse of the director owns a further 11%, the director and connected person (spouse) now own 51% of the shares and the director then is deemed to have control of the first company. The fees do not then fall within the regulation and cannot be excluded from Class 1 NICs liability.

Control of a company can be by various means in addition to holding a majority of the voting share capital. Detailed information is in CT Manual. If you are unsure whether the control test is satisfied you should consult the Inspector of Taxes dealing with the company.