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HMRC internal manual

Employment Income Manual

Employment income: directors' fees received by partnerships: exemption from charge to income tax under Part 2 of ITEPA: conditions to be met

Section 6(5) ITEPA 2003, section 16B ITTOIA 2005, section 40A CTA 2009

As shown at EIM02500, directors’ fees paid to a member of a partnership may be exempt from charge to income tax under Part 2 of ITEPA and charged instead as receipts of the partnership. Section 16B of the Income Tax (Trading and Other Income) Act 2005 and section 40A of the Corporation Tax Act 2009 set out the conditions that must be met before this treatment of directors’ fees can be allowed.

The treatment can apply where:

  • a company makes a payment to or for the benefit of a director in respect of the director’s employment as a director of that company
  • the payment would otherwise be employment income of the director chargeable to tax under Part 2 of ITEPA
  • the director was or is a member of a firm (i.e. a partnership)

Where this is the case, the treatment can be allowed if all of the following conditions are met:

  • the director carries on a profession
  • being a director of a company is a normal incident of that profession and  of membership of the firm
  • the director is required by the terms of the partnership agreement to account to the firm for the payment
  • the amount of the payment is insubstantial, compared with the total amount brought into account as receipts when calculating the firm’s profits

For further information regarding the term “insubstantial”, see EIM02502.

Where the conditions are met the payment can be treated for income tax purposes as a receipt of a trade carried on by the firm. For details of the process that applies where such a request is received, see EIM02503.