Directors Unexpected Payroll Tax Liability
First published in The Bermuda Chamber Of Commerce Newsletter (Chamber Insider) July 2019.
Payroll tax is levied against every employer, employee, self-employed person and deemed employee. While this may appear to be straightforward, care should be taken to distinguish whether or not payroll tax is applicable even when in the ordinary course a relationship may not appear to be within the scope of these categories as failure to do so may result in a maximum penalty of 30% of the outstanding tax liability. In this feature, the focus is on payroll tax and directors as it is quite common for directors’ payroll tax status to be incorrectly determined.
Section 5 of the Payroll Tax Act 1995 (Act) provides, in its pertinent parts, (a) an individual who is a director, officer or member of the governing body of a body corporate (i.e. registered company) is an employee of that body corporate for the purposes of the Act; (b) an individual who is a director, officer or member of the governing body of an exempt undertaking is not for the purposes of the Act an employee of that exempt undertaking, but he is for those purposes such an employee if under a contract of service he regularly performs managerial functions in connection with the day-today conduct of the exempt undertaking’s affairs.
Pursuant to the Act, an “exempt undertaking” includes, inter alia, an exempted undertaking and that term has the meaning assigned to it in the Companies Act 1981 (Companies Act), namely, an exempted company registered under the Companies Act and is stated in its memorandum to be an exempted company. The Act does provide certain carve outs for exempted companies (e.g. one which requires a licence under the Companies Act or authority under some other public Act to carry on business or a private Act company which would otherwise require such a licence or authority).
A body corporate that is not an exempt undertaking includes a local company.
Accordingly, directors of:
- a local company or
- of an exempted company (subject to the above carve outs), who under a contract of service he regularly performs managerial functions in connection with the day-today conduct of the exempt undertaking’s affairs,
are considered “employees” for the purposes of the Act.
Section 4 of the Act generally provides that for the purposes of the Act, the employer of a person (call the employer “A” and the latter “B”) is the person to whom B renders services as A’s employee within section 5.
The effect of sections 4 and 5 of the Act is that where a director is considered an employee for the purposes of the Act (as set out above), the company in which such director is acting as director will be liable to payroll tax in respect of any remuneration paid to that director in his capacity as director and payroll tax will also be chargeable on such director as if he were an employee for any remuneration paid to him in his capacity as director.
This note is intended as a high level overview of this topic and there may be a number of other issues which will also require consideration. Legal advice should always be sought on a case by case basis.
