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HMRC internal manual

Employment Income Manual

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HM Revenue & Customs
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Living accommodation: avoidance area: shadow directors

Sections 67(1) ITEPA 2003A person in accordance with whose directions or instructions the directors of a company are accustomed to act is deemed to be a director of that company by Section 67(1) ITEPA 2003. Where such a person (known as a shadow director) is provided with living accommodation by the company the individual will be within Part 3 Chapter 5 ITEPA 2003 in the same way as if the individual had held a formal appointment as a director. Section 67(1) defines director in relation to the benefits code and Section 63 ITEPA 2003 includes Part 3 Chapter 5 within the benefits code.

This interpretation was supported by the House of Lords in October 2001 in the case of Regina v Allen. Lord Hutton held that
“it was the intention of Parliament in enacting the concluding part of Section 168(8) that accommodation and benefits in kind received by a shadow director should be taxed in the same way as those received by a director.”
(Section 168(8) ICTA 1988 was rewritten as Section 67(1) ITEPA 2003).

Many shadow directors are individuals who, although not domiciled in the UK, have come to work and reside here. In order to avoid a possible charge to inheritance tax, which could be imposed if such an individual died whilst working in the UK, an arrangement is made to set up an offshore company that owns the UK property in which the individual lives. Where the individual is a shadow director of that offshore company Section 97(2) ITEPA 2003 deems the UK property to be provided to the shadow director by reason of the deemed employment.