Director Service Agreement UK 2025: Statutory Duties, Tax Implications & Legal Requirements [Complete Guide]

What is a Director Service Agreement?

Quick Answer: A Director Service Agreement (DSA) is a formal legal contract between a company and its director that outlines the terms of their appointment, remuneration, responsibilities, and the framework governing their relationship. It establishes the director’s role, duties under company law, entitlements, and post-termination restrictions to protect both the company and the director.

A Director Service Agreement goes beyond a standard employment contract. It’s a comprehensive document that captures the unique position of directors who often occupy dual roles: as both senior executives managing the company’s affairs and as fiduciaries answerable to shareholders.

Key Differences from Standard Employment Contracts

Unlike ordinary employment contracts, a DSA specifically addresses:

• Statutory duties: Reference to Companies Act 2006 duties and fiduciary responsibilities
• Decision-making authority: Board-level governance and strategic decision-making powers
• Conflicts of interest: Provisions for managing potential conflicts between director roles and shareholder interests
• Restrictive covenants: Enhanced non-compete, non-solicitation, and confidentiality provisions specific to director-level information access
• Intellectual property: Clear assignment of any innovations or creative works developed during tenure
• Exit provisions: Garden leave, notice periods, and transition protocols for leadership changes

According to the IoD (Institute of Directors), a properly drafted DSA clarifies expectations for both parties, reducing the risk of disputes and protecting valuable business interests during sensitive transitions.

Is a Director Service Agreement Legally Required?

Quick Answer: No, a Director Service Agreement is not a strict legal requirement in the UK. However, it is considered essential best practice. Directors who are employees must receive a written statement of employment terms under the Employment Rights Act 1996. Without a formal DSA, you face significant governance, tax, and employment law risks.

While the Companies Act 2006 doesn’t mandate a director service agreement, it does require that companies keep any director service contracts available for shareholder inspection. This implies that having a properly documented agreement is expected governance practice.

Why Courts and Regulators Expect a DSA

Even though not legally required, failing to have a DSA can create serious problems:

• Employment law compliance: Directors who are also employees have statutory rights to written employment terms. Absence of these opens the company to tribunal claims
• Governance scrutiny: During audit or shareholder disputes, lack of formal director agreements raises red flags about corporate governance standards
• Tax determination: HMRC scrutinises the relationship between companies and director-shareholders. Without clear contractual terms, IR35 status becomes harder to defend
• Dispute resolution: If a director is dismissed, sued, or disputes their entitlements, a clear written agreement protects both parties
• Shareholder protection: Shareholders often require evidence of proper director agreements before approving significant transactions

The practical answer: Every UK company with executive directors should have a formal, legally reviewed DSA in place.

How Does a Director Service Agreement Work?

Quick Answer: A Director Service Agreement operates as a binding contract establishing the terms between the company and director, including remuneration, duties, authority, and termination conditions. Both parties are legally obligated to follow its terms, and it takes precedence over informal arrangements. Breach of the agreement can lead to termination, claims for damages, or injunctions.

The DSA functions as the foundation of the director-company relationship. Here’s how it works in practice:

The Three-Stage Process

Stage 1: Drafting and Board Approval

The company (usually through its HR or legal team) drafts the agreement based on the director’s role. The draft is approved by the board before being offered to the director. For listed companies, shareholder approval may be required for significant remuneration packages or lengthy notice periods exceeding industry norms.

Stage 2: Acceptance and Execution

The director reviews the agreement (ideally with independent legal advice) and signs it. Execution as a deed (requiring witness signatures) adds legal formality and strength, particularly for restrictive covenants. Once signed, both parties are legally bound by the terms.

Stage 3: Ongoing Compliance

During employment, both parties must comply with the agreement’s terms. The company must pay agreed remuneration, provide benefits, and follow notice periods. The director must discharge their statutory duties, maintain confidentiality, and observe any restrictive covenants. The company can enforce breaches through injunctions, damages claims, or dismissal for cause.

Legal Enforceability

Director service agreements are fully enforceable contracts under English law. Key enforcement mechanisms include:

• Specific performance: Courts can order a party to fulfill contractual obligations (e.g., requiring a director to serve their notice period)
• Injunctive relief: Courts can prevent breach of restrictive covenants or confidentiality clauses, including non-compete provisions
• Damages: Breaching parties may be liable for financial compensation to the injured party
• Dismissal: Material breach by the director justifies summary dismissal (without notice or payment in lieu)

For restrictive covenants to be enforceable, they must be “reasonable” in scope, duration, and geographical area. Courts regularly strike down overly broad restrictions (e.g., a 5-year worldwide non-compete) as unreasonable restraints of trade.

Key Clauses Every Director Service Agreement Must Include

A comprehensive DSA should contain these essential provisions to ensure legal compliance and protect both parties:

1. Appointment and Duties

The agreement must clearly state the director’s appointment to the board and reference their statutory duties under the Companies Act 2006. These include duties to:

• Act within their powers as defined by the company’s articles of association
• Promote the success of the company for the benefit of its members
• Exercise independent judgment
• Exercise reasonable care, skill, and diligence
• Avoid conflicts of interest
• Declare material interests in transactions or arrangements
• Not accept benefits from third parties arising from their position
• Disclose relevant audit information to the company’s auditors

2. Remuneration and Benefits

The DSA must specify:

• Base salary: Fixed annual compensation
• Performance bonus: Conditions and metrics for annual or discretionary bonuses
• Benefits package: Private healthcare, pension contributions, life insurance, car allowances
• Share schemes: Employee share options, restricted share awards, or performance share plans
• Expense reimbursement: Travel, accommodation, professional development
• Holiday entitlement: Statutory minimum (28 days) plus any contractual entitlements

3. Termination Provisions

Clear termination clauses protect both parties and prevent costly disputes:

• Notice period: Length of notice required by either party to terminate without cause (typically 3-6 months for directors)
• Payment in lieu of notice: The company’s right to pay a director’s notice period salary instead of requiring them to work it
• Garden leave: Provisions requiring the director to remain away from work during their notice period while receiving salary
• Termination for cause: Circumstances allowing immediate dismissal without notice (gross misconduct, material breach)
• Severance/redundancy: Any enhanced payments due upon redundancy beyond statutory minimums

4. Confidentiality and Intellectual Property

Directors access highly sensitive business information and must agree to strict confidentiality:

• Confidentiality obligations: Duty to protect company information during and after employment
• Duration: Typically extends indefinitely for some information (trade secrets) and 3-5 years for other confidential business information
• Permitted disclosures: Limited exceptions (e.g., to legal advisors, HMRC, with board permission)
• IP assignment: All work product, innovations, and creative works belong to the company
• Social media policy: Restrictions on discussing company matters or client details on LinkedIn and social platforms

5. Restrictive Covenants

These post-termination restrictions protect the company’s legitimate business interests. For enforceability, they must be “reasonable”:

• Non-compete: Typically 6-12 months; prevents working for direct competitors in defined sectors/geographies
• Non-solicitation of customers: Usually 12-24 months; prevents approaching company clients or customers post-departure
• Non-solicitation of employees: Often 6-12 months; prevents poaching or recruiting company staff
• Non-dealing: Prevents engaging in business with company customers on behalf of a competitor

Important: Courts scrutinise restrictive covenants carefully. Overly broad restrictions (excessive duration, geographic scope, or industry coverage) will be struck down as unreasonable restraints of trade. It’s essential to tailor restrictions to the director’s actual role and the company’s legitimate business needs.

6. Conflicts of Interest and Related Party Transactions

Must address:

• Procedures for declaring conflicts of interest in board decisions
• Requirements to recuse themselves from discussions where they have a material interest
• Restrictions on entering into transactions with connected parties without board approval
• Disclosure of shareholdings and beneficial interests

7. Company Policies and Compliance

The DSA should require the director to comply with:

• Anti-bribery and corruption policy (Bribery Act 2010)
• Anti-money laundering procedures
• Health and safety policy
• Data protection and GDPR compliance procedures
• Whistleblowing policy
• Code of conduct and ethics policy

8. Monitoring and Compliance Provisions

Modern DSAs typically include:

• Right for the company to monitor email and communications on company equipment
• Right to conduct background checks and ongoing vetting
• Requirement to undergo reasonable medical examinations if role demands
• Annual declarations of conflicts, interests, and regulatory compliance status

How Does IR35 Affect Director Service Agreements?

Quick Answer: IR35 (off-payroll working rules) can affect director-contractors who supply services through a personal service company (PSC). The legislation determines whether the director is classified as an employee (“inside IR35”) or self-employed (“outside IR35”) for tax purposes. If inside IR35, the company or fee-payer must deduct PAYE and National Insurance, reducing the director’s take-home pay by 20–30% compared to outside IR35 status. Misclassification can result in substantial tax penalties and disputed assessments.

Since April 2025, significant changes to IR35 thresholds mean approximately 14,000 smaller businesses have been relieved of their IR35 determination responsibilities, shifting the burden back to contractors where the client is classified as a “small” company.

IR35 Status Determination: Key Changes from April 2025

Who Determines IR35 Status?

• Private sector (small businesses): The contractor (director) is responsible for determining their own IR35 status (as of April 2025)
• Private sector (medium/large businesses): The client/company is responsible for determining IR35 status
• Public sector: All public bodies, regardless of size, must determine IR35 status

From April 6, 2025, “small company” thresholds increased. A company is now classed as small if it meets at least two of these criteria:

• Annual turnover — £11.9 million (previously £10.2 million)
• Total assets — £5.95 million (previously £5.1 million)
• Average headcount — 50 employees

Inside vs. Outside IR35: Tax Implications

Inside IR35:

• The company/fee-payer deducts PAYE income tax and employee National Insurance from the director’s fees
• The company also pays employer National Insurance (13.8% on earnings above £175/week)
• No tax-efficient dividend extraction or expense deductions
• No holiday pay, sick pay, or employee benefits (despite employee tax treatment)
• Net result: 20–30% reduction in take-home pay compared to outside IR35

Outside IR35:

• The director-contractor receives fees without tax deduction; pays taxes via self-assessment and corporation tax
• Access to tax-efficient strategies: salary/dividend mix, expense deductions (office supplies, professional fees, vehicle costs)
• Lower National Insurance: Class 2 (flat rate c.£163/year) plus Class 4 (8–10% on profits)
• Greater control over tax planning
• Higher take-home pay potential, but no statutory employment protections

HMRC’s IR35 Assessment Factors for Directors

When determining IR35 status, HMRC considers:

• Control: Does the company dictate how, when, and where work is performed? High company control = likely inside IR35
• Personal service: Can the director delegate to others or substitute someone else? No substitution right = likely inside IR35
• Mutuality of obligation: Is work guaranteed? Are there ongoing obligations beyond individual contracts? Yes = likely inside IR35
• Financial risk: Does the director bear financial risk (unfunded expenses, liability for losses)? No risk = likely inside IR35
• Integration: Is the director integrated into the company structure, using company systems, branding, and hierarchy? Yes = likely inside IR35
• Provision of equipment: Does the company provide tools, software, office space? Yes = inside IR35 indicator

Critical: HMRC emphasises that written contracts must reflect actual working practices. A contract claiming outside IR35 status will be disregarded if the director is treated as an employee in reality.

Recent Case Law: What Triggers HMRC Challenges?

Recent tribunal cases demonstrate HMRC’s aggressive enforcement in 2024–2025:

• Phil Thompson (Sky Sports pundit): Lost appeal on £300,000 IR35 bill; tribunal found him inside IR35 despite contracting through a PSC
• Stuart Barnes (former rugby player): Successfully defended outside IR35 status by demonstrating genuine substitution rights and financial risk
• Adrian Chiles (broadcaster): Settled an inside IR35 determination after HMRC challenged his classification

The pattern: HMRC wins when the director’s working practices match an employee’s (reporting to a boss, working fixed hours, no ability to send a substitute), regardless of contract language.

How to Defend Outside IR35 Status

If you want to be classified outside IR35:

• Right of substitution: Explicitly allow the director to send a qualified substitute if they can’t perform the work (strongest evidence of self-employment)
• Financial risk: Ensure the director has genuine financial exposure (unfunded equipment, liability for project overruns, ability to make losses)
• Mutuality clarity: Define specific projects or contracts rather than ongoing roles with guaranteed work
• Independence markers: Use the director’s own branding, invoice for services, market to multiple clients, maintain other business activities
• Documentation: Ensure written contracts, invoicing, and working practices all align with the claimed status

Pro tip: Use HMRC’s CEST tool (Check Employment Status for Tax) as a starting point, but don’t rely on it solely. Consult a specialist IR35 accountant or solicitor to build a robust determination supported by actual working arrangements.

Is a Director Service Agreement Tax Deductible?

Quick Answer: No, the cost of creating a director service agreement is not directly tax deductible as a business expense. However, the remuneration paid under the agreement (salary, bonuses, benefits) is fully deductible for corporation tax purposes if it’s a genuine commercial expense. Some related costs (legal fees for drafting, HR consultancy) may be deductible if the work is wholly and exclusively for business purposes, though this is context-dependent.

Here’s the practical breakdown:

Tax-Deductible Costs

• Director salary: Fully deductible if reasonable for the role and genuinely earned
• Employer National Insurance: On director salary (13.8% of earnings above £175/week)
• Pension contributions: Company contributions to registered pension schemes are deductible
• Benefits: Business insurance, mobile phones, professional fees directly related to the directorship
• Legal and HR costs for termination: If the agreement is terminated due to redundancy or restructuring, exit legal costs may be deductible

Non-Deductible or Limited-Deductibility Items

• Cost of drafting the agreement: Generally not deductible as it’s capital expenditure (setting up an ongoing governance structure)
• Gifts or discretionary benefits: Unless genuinely business-related, gifts to directors aren’t deductible
• Amounts paid in lieu of notice beyond statutory entitlements: Generally deductible, but excessive amounts may be challenged

Always seek advice from your accountant on specific benefits or payments to ensure tax treatment aligns with current HMRC guidance.

Do Director Service Agreements Pay VAT in the UK?

Quick Answer: No, VAT is not charged on director salaries or remuneration paid under a service agreement. Salaries and wages are not subject to VAT. However, if a director is also a client-contractor (providing services through a personal service company), the company may need to charge VAT on fees invoiced to clients, depending on the nature of services and VAT registration status.

The distinction is important:

No VAT on Salary/Remuneration

Remuneration paid to a director under a service agreement (salary, bonuses, benefits) is not subject to VAT. VAT is a tax on the supply of goods and services, not on employment income.

Potential VAT on Services Provided by Director-Contractors

If the director’s company is a personal service company (PSC) that invoices clients for services, VAT may apply:

• If VAT-registered: The PSC must charge VAT on professional services (typically at 20%) unless an exemption applies
• VAT exemptions: Certain services (education, health, financial services) may have exemptions, but most consulting or professional services are standard-rated at 20%
• VAT threshold: A PSC must register for VAT if its turnover exceeds £90,000/year (as of April 2024)

This is a VAT treatment question on the services provided by the PSC, not on the director’s salary itself.

What Employment Rights and Protections Do Directors Have Under a Service Agreement?

Quick Answer: Directors who are also employees have statutory employment rights under UK employment law, including protection from unfair dismissal, discrimination, and the right to statutory notice periods, holiday pay, and sick pay. However, these rights can be modified by the terms of a service agreement if done fairly and reasonably. Non-executive directors without employment contracts have limited protections.

Directors as Employees: Full Employment Rights

Most executive directors are legally classified as employees if they meet these criteria:

• The company has the right to control their work
• There’s an expectation of mutual obligation (work availability, company obligation to provide work)
• They’re integrated into the company structure with specified duties and reporting lines

If classified as an employee, the director has these statutory protections:

Statutory Notice Periods

UK law provides minimum notice periods:

• Employed 1 month to 2 years: 1 week’s notice
• Employed 2–12 years: 1 week per year of service
• Employed 12+ years: 12 weeks’ notice

Service agreements typically provide notice periods longer than statutory minimums (e.g., 3–6 months for senior directors) to allow time for transition and replacement.

Unfair Dismissal Protection

Directors employed for 2+ years are protected against unfair dismissal. An employer can only dismiss fairly if there’s:

• Capability (poor performance, illness, lack of skill)
• Conduct (breach of DSA terms, gross misconduct)
• Redundancy
• Breach of law or regulatory requirement
• Some other substantial reason (e.g., irreconcilable conflict with majority shareholders)

Dismissal without a fair reason triggers potential claims for compensation (up to £105,493 in 2024/25) plus reinstatement or re-engagement orders.

Discrimination Protection

Directors are protected against discrimination based on:

• Age
• Disability
• Gender reassignment
• Marriage or civil partnership
• Pregnancy or maternity
• Race (including colour, nationality, ethnic/national origin)
• Religion or belief
• Sex
• Sexual orientation

Breaches of discrimination law can result in substantial awards (no cap on compensation) and reputational damage.

Holiday Pay and Leave Entitlements

All employees (including directors) have statutory rights to:

• Minimum 28 days’ paid annual leave (including bank holidays)
• Payment for accrued but untaken holiday upon termination
• Statutory sick pay (if unwell for 3+ consecutive days)
• Maternity/paternity leave (26 weeks’ ordinary maternity leave; 2 weeks’ paternity leave)

Service agreements cannot contract out of these rights, though they can enhance them (e.g., offering 30 days’ leave).

Whistleblowing Protection

Directors and employees are protected if they make “protected disclosures” about:

• Criminal offences
• Breach of legal obligation
• Miscarriage of justice
• Endangerment of health and safety
• Environmental damage
• Deliberate concealment of any of the above

A company cannot dismiss or penalise a director for making a protected disclosure.

Non-Executive Directors: Limited Protections

Non-executive directors may not have employment status if their engagement is purely for board representation without employee-type duties. They might be classified as:

• Self-employed consultants: No employment rights; relationship governed by service contract terms
• Office holders: Limited statutory protections; governed primarily by articles of association and any appointment letter

However, if a non-executive director is actually integrated into daily operations or exercises executive-style control, courts may find them to be employees despite their title, entitling them to employment law protections.

What Are the GDPR and Data Protection Implications of a Director Service Agreement?

Quick Answer: Director service agreements must comply with UK GDPR regulations (retained EU law post-Brexit). Companies must ensure that:

• Personal data (salary, address, sensitive health/disability information) is processed lawfully with the director’s consent
• Data is kept secure with appropriate safeguards against breaches
• Directors receive privacy notices explaining how their data is used
• Data breaches affecting directors are reported to the ICO (Information Commissioner’s Office) within 72 hours if high risk
• Monitoring provisions (email surveillance, GPS tracking) are transparently documented in the agreement

Personal Data Typically Collected Under a DSA

Companies collect and process:

• Identification data (name, address, date of birth, National Insurance number)
• Contact information (phone, email, emergency contacts)
• Financial data (salary, banking details for payroll)
• Tax information (P60, tax code, self-assessment returns for director-shareholders)
• Health and disability information (occupational health reports, medical examinations)
• Background check data (criminal record checks, credit history, reference checks)
• Electronic communications (emails, messages sent on company devices)
• Office location data (if using CCTV or access control systems)

Legal Basis for Data Processing

The company must have a lawful basis under UK GDPR Article 6, typically:

• Consent: The director explicitly agrees to data processing (e.g., occupational health assessments)
• Contract performance: Processing is necessary to perform the employment contract (salary, benefits administration, tax reporting)
• Legal obligation: Processing is required by law (HMRC reporting, auto-enrolment pension compliance)
• Employer’s legitimate interests: Balancing necessity (e.g., monitoring software for cybersecurity) against the director’s privacy rights

For sensitive personal data (health, disability, criminal records), even stronger safeguards apply under Article 9 GDPR.

Monitoring and Surveillance Clauses

The DSA should clearly disclose if the company reserves the right to:

• Email monitoring: Access to company email accounts for compliance or security purposes
• Computer monitoring: Keylogging, website usage tracking, or document access logs
• CCTV surveillance: Recording in office areas for security purposes (but not private areas like toilets)
• Location tracking: GPS tracking of company vehicles or mobile devices (consent required; must be transparent)

UK courts expect employers to balance business needs (security, IP protection) with the director’s privacy expectations. Covert surveillance without disclosure is likely unlawful.

Data Breach Notification and Reporting

If the company suffers a data breach affecting the director’s personal data:

• 72-hour rule: Report high-risk breaches to the ICO within 72 hours
• Director notification: Notify the director without undue delay if there’s high risk to their rights (e.g., unauthorized access to sensitive data)
• Breach record: Document all breaches internally for audit purposes

Failure to report breaches can result in ICO fines up to £17.5 million or 4% of annual global turnover (whichever is higher).

Privacy Policy and Transparency

The company must provide the director with a transparent privacy notice explaining:

• What personal data is collected and why
• How long data is retained
• Who has access to the data (payroll, HR, auditors, tax authorities)
• The director’s rights (access, correction, deletion, portability)
• The director’s right to lodge a complaint with the ICO

What Insurance and Liability Requirements Apply to Director Service Agreements?

Quick Answer: Directors should have professional indemnity insurance (if providing specialist services), the company should carry directors and officers liability insurance to protect against personal liability claims, and employment practices liability insurance to cover wrongful termination or discrimination claims. Additionally, the company must meet statutory employers’ liability insurance requirements (£5 million minimum cover) and maintain adequate public liability insurance.

Directors and Officers Liability Insurance

What it covers:

• Personal liability of directors for breach of duty to the company
• Claims by shareholders alleging breach of fiduciary duty
• Defense costs for regulatory or employment tribunal claims
• Claims under the Companies Act or UK corporate governance rules
• Mismanagement allegations, conflict-of-interest disputes, and director loans

Why it’s essential: Directors face personal liability for breaches of statutory duty under Companies Act 2006. Without insurance, a director could be personally sued for millions. Large companies typically carry £5–£50 million covers; SMEs usually £2–£10 million.

Typical cost: £2,000–£10,000 annually depending on turnover, risks, and company profile.

Employment Practices Liability Insurance (EPLI)

What it covers:

• Wrongful termination claims (breach of employment contract, unfair dismissal)
• Discrimination claims (age, disability, race, sex, religion)
• Harassment and bullying allegations
• Breach of privacy claims
• Defense costs and settlements for employment tribunal claims

Why it matters for DSAs: The financial impact of employment disputes is substantial. Unfair dismissal awards can reach £100,000+; discrimination claims have no upper cap. EPLI covers these costs.

Typical cost: £1,500–£5,000 annually for small companies.

Employers’ Liability Insurance (Statutory Requirement)

Mandatory coverage: All UK companies with employees must carry statutory employers’ liability insurance of at least £5 million.

What it covers:

• Director’s injuries at work (workplace accidents)
• Occupational diseases (e.g., asbestos exposure, noise-induced hearing loss)
• Breaches of Health and Safety at Work Act 1974 liability

Failure to insure: Companies operating without employers’ liability insurance face unlimited fines and potential criminal prosecution of directors.

Public Liability Insurance

What it covers:

• Bodily injury to third parties caused by the company’s operations
• Property damage caused by the company’s negligence
• Legal defense costs

Typical covers: £1–£10 million depending on business sector. Essential for companies hosting clients or conducting off-premises work.

Professional Indemnity Insurance (If Applicable)

When required: If the director or company provides professional services (legal, accounting, consulting, architectural, engineering).

What it covers:

• Claims arising from professional negligence or errors in service provision
• Claims that the company/director failed to provide services with reasonable care
• Defense costs for regulatory investigations

Industry requirements: Some professions (solicitors, chartered accountants) are legally required to carry PI insurance.

Directors’ Liability Under DSAs: Key Risk Areas

Service agreements should clarify liability for:

• Breach of statutory duty: Negligent management, failure to maintain proper records, breach of Companies Act duties
• Misappropriation of company assets: Unauthorised loans to self or connected parties
• Conflicts of interest: Engaging in conflicting business activities without disclosure
• Environmental liability: Failure to comply with environmental regulations
• Health and safety breaches: Failure to maintain safe working conditions or follow HSE guidance

How to Implement a Director Service Agreement Successfully

Quick Answer: Implementation involves seven key steps: (1) engage legal counsel to draft a bespoke agreement based on the director’s role and company circumstances, (2) have the board review and approve it, (3) provide the director with a copy and time to seek independent legal advice, (4) execute the agreement as a formal deed with witness signatures, (5) file a copy with the company’s records and provide it to the director, (6) ensure ongoing compliance monitoring by HR, and (7) review and update annually to reflect changes in law or role.

Step 1: Pre-Drafting Consultation and Needs Assessment

Before drafting, clarify:

• Director’s role: Executive or non-executive? Full-time or part-time?
• Remuneration structure: Salary range, bonus metrics, benefits package
• Notice period: How much time for transition if the director leaves?
• Restrictive covenants: What post-employment restrictions are reasonable for the role?
• Regulatory requirements: Are there sector-specific compliance obligations (financial services, healthcare)?
• Shareholding: If the director is also a shareholder, how does the agreement interact with a shareholders’ agreement?

Step 2: Engage Qualified Legal Counsel

Use a solicitor experienced in employment law and corporate governance to draft the agreement. Generic templates often miss critical provisions and may not be enforceable for restrictive covenants.

Why professional drafting matters:

• Restrictive covenants drafted incorrectly won’t be enforced by courts (they’ll be struck down as unreasonable)
• Mandatory statutory terms (holiday pay, notice periods, grievance procedures) must be included to avoid tribunal claims
• Industry-specific or regulatory requirements (GDPR, anti-bribery, financial services rules) must be incorporated
• The agreement must reflect the true working relationship; misaligned contracts undermine tax status (IR35 challenges)

Typical cost: £1,000–£3,000 for drafting a bespoke DSA (often cheaper than tribunal costs if disputes arise).

Step 3: Board Review and Approval

The agreement must be reviewed and formally approved by the board before being offered to the director. For listed companies or those with substantial director remuneration, shareholder approval may be required.

Board approval minutes should document:

• The director’s role and proposed remuneration
• Any material changes to previous terms
• That the terms are fair and reasonable for the market
• Compliance with company articles of association

Step 4: Offer and Independent Legal Advice

Provide the director with:

• A copy of the draft agreement
• Reasonable time to review (at least 7 days, ideally 10-14 days)
• Encouragement to seek independent legal advice (especially important for restrictive covenants)
• Opportunity to negotiate terms if appropriate (e.g., if new issues arise)

Why independent advice matters: If a director later challenges restrictive covenants or other terms, they’re more likely to succeed if they can argue they were unfairly imposed without opportunity for advice. Providing advice opportunity protects the company.

Step 5: Execution as a Formal Deed

For maximum enforceability, execute the agreement as a deed:

• Both the company (via a director or company secretary) and the director sign the agreement
• Signatures are independently witnessed by a third party (not a family member)
• Witnesses sign and provide their names, addresses, and occupations
• The agreement is dated and marked as executed

Why deed execution matters: Restrictive covenants (non-compete, non-solicitation) are more likely to be enforceable if the agreement is executed as a deed. Simple signatures are less persuasive.

Step 6: Filing and Record Keeping

Within 7 days of execution:

• File a copy with Companies House: Listed companies must file director service contracts (or a memorandum of terms) with Companies House within 7 days of signature
• Private companies: Must keep a copy available for shareholder inspection at the registered office
• HR records: File the agreement securely in the director’s personnel file with restricted access (only HR and authorized managers)
• Director’s copy: Provide a signed copy to the director for their records

Data protection consideration: Store the agreement securely and ensure it’s only accessible to those with legitimate need (HR, payroll, finance, auditors).

Step 7: Ongoing Compliance Monitoring and Annual Review

HR should:

• Monitor compliance: Ensure remuneration is paid on time, benefits are provided, and notice procedures are followed
• Annual review: Check that terms remain compliant with current law (new tax thresholds, employment law changes, sector regulations)
• Update as needed: If the director’s role changes significantly or new legal requirements arise, discuss amendments with the director and legal counsel
• Conflict of interest checks: Ensure annual declarations are completed and any conflicts properly managed
• Training: Ensure the director remains aware of obligations (confidentiality, GDPR compliance, whistleblowing procedures)

Sample review triggers:

• Annual tax law changes (NI thresholds, salary tax bands, pension limits)
• Promotion or role expansion (agreement may need updating for new responsibilities)
• Changes to statutory rights (new employment law, sector-specific regulations)
• Company restructuring or changes in ownership
• New regulatory requirements affecting the company’s sector

Common Implementation Pitfalls to Avoid

• Using generic templates without customization: Off-the-shelf templates rarely fit specific roles and often miss mandatory statutory terms
• Inadequate restrictive covenants: Overly broad restrictions will be unenforceable; too narrow ones won’t protect the company
• Failing to execute as a deed: Simple signatures weaken enforceability of restrictive covenants in court
• No independent legal advice opportunity: Increases risk the director will later challenge terms as unfairly imposed
• Inconsistent with actual working practices: If written terms don’t match reality, courts may disregard the contract (especially for IR35 determinations)
• Missing shareholder approval: Listed companies must obtain shareholder approval for director contracts; failure undermines the agreement’s validity

Frequently Asked Questions: Director Service Agreements

Can a Director Approve Their Own Service Agreement?

Technically, a director as a board member could vote to approve their own DSA. However, this creates a conflict of interest. Best practice (and expected by shareholders and auditors) is that:

• The director recuses themselves from the board vote approving their agreement
• Independent directors (non-conflicted board members) approve the terms
• If there are insufficient independent directors, a shareholder vote should be held

This protects the company from later challenges by shareholders claiming the director abused their position.

What Happens If a Director Breaks Their Service Agreement?

If the director breaches the DSA (e.g., violating confidentiality, competing during notice period), the company can:

• Seek injunctive relief: Court order preventing further breach (e.g., stopping the director from working for a competitor)
• Claim damages: Financial compensation for losses resulting from the breach
• Terminate for cause: Dismiss the director for material breach (without notice or severance if gross misconduct)
• Enforce restrictive covenants: Sue the director for breach of non-compete or non-solicitation clauses

Can a Director’s Service Agreement Be Changed After They Start?

Yes, but both parties must agree. Changes should be made in writing, ideally as a formal deed of variation or amendment signed by both parties. Unilateral changes imposed by the company may trigger breach of contract claims if they’re detrimental to the director.

Example: If a company wants to reduce a director’s salary or extend restrictive covenants without agreement, the director could resign and claim constructive dismissal (unfair dismissal where the employer breaches fundamental terms).

What’s the Difference Between a Director Service Agreement and a Shareholders’ Agreement?

Director Service Agreement: Governs the employment relationship between the company and the director (role, duties, remuneration, termination). It’s an employment contract.

Shareholders’ Agreement: Governs the relationship between shareholders of the company (including the director if they hold shares). It covers voting rights, dividend policies, dispute resolution, and share transfer restrictions.

A director who is also a shareholder may have both documents. They address different relationships and serve different purposes.

How Long Should a Director Service Agreement Be?

Typically 10–30 pages depending on complexity:

• Simple DSA (non-executive, part-time): 8–12 pages
• Standard executive DSA: 15–25 pages
• Complex DSA (listed company, substantial remuneration, multiple subsidiaries): 25–40+ pages

Length isn’t a quality marker; comprehensiveness is. A short agreement missing mandatory terms (holiday pay, notice procedures, grievance rights) is worse than a detailed one addressing all scenarios.

Do Directors of Private Limited Companies Need Formal Service Agreements?

Not legally required, but strongly recommended. Many private company directors operate informally, but this creates risks:

• Disputes over salary, bonuses, or entitlements
• Employment tribunal claims for unfair treatment
• Uncertainty during leadership succession or disputes
• Tax authority challenges (IR35, expense claims) due to lack of documentation

Even informal businesses benefit from a basic DSA outlining role, remuneration, and exit terms.

What Happens to a Director Service Agreement If a Company Is Acquired?

The acquiring company may:

• Honour the existing DSA: Continue all terms unchanged
• Offer new terms: Request the director sign a new agreement reflecting the acquiring company’s policies (common in acquisitions)
• Terminate and settle: Pay the director severance based on the existing DSA (notice period, redundancy terms)

If the DSA includes a change of control clause, it might trigger additional payments or severance entitlements upon acquisition. This should be addressed specifically in the agreement.

Can Restrictive Covenants in a Director Service Agreement Be Enforced?

Yes, but only if they’re “reasonable” in scope, duration, and geographic area. Courts regularly strike down overly broad restrictions. Enforceable restrictions typically:

• Non-compete: 6–12 months (longer periods often fail)
• Non-solicitation: 12–24 months
• Geographic scope: Reasonable to the company’s business (e.g., not a worldwide ban for a UK-only business)

Restrictions must also protect legitimate business interests (trade secrets, client relationships, staff retention), not just prevent competition.

Is a Director’s Service Address Different from Their Service Agreement?

Yes, completely different concepts:

Service address: A registered address where legal documents can be served on the director. It can be anywhere worldwide (does not have to be in the UK). Registered at Companies House as part of the director’s appointment details.

Service agreement: The employment contract defining the director’s role and duties with the company.

They’re unrelated; both are necessary for proper company governance.

Best Practices for Director Service Agreements

Annual Compliance Audit

Each year, review your director service agreements against:

• Latest tax thresholds (National Insurance, pension contribution limits, salary sacrifice benefits)
• New employment law changes (ACAS guidance, tribunal decisions, legislative updates)
• Company governance updates (board policy changes, regulatory compliance new requirements)
• Role evolution (has the director’s responsibilities changed significantly?)

Documentation and Record Keeping

Maintain secure records of:

• Signed original DSA and any subsequent amendments (deed of variation)
• Board minutes approving the agreement
• Evidence of independent legal advice (optional but protective)
• Annual declarations of conflicts of interest
• Remuneration records (payroll, bonuses, benefits reconciliation)
• Correspondence regarding any disputes or claims

Linking DSAs to Shareholders’ Agreements

If the director is also a shareholder, ensure the DSA and shareholders’ agreement work together harmoniously:

• Consistent definitions and terms
• Clear hierarchy if terms conflict (typically, shareholder agreements govern share matters; DSAs govern employment)
• Aligned notice periods and exit procedures
• Coordinated change of control provisions