Hi All,
The facts are as follows. A was employed by ABC ltd as company accountant and was responsible for all tax and accounting affairs. A has accrued a large bonus, then when the bonus is paid out it is around 10% of the accrual. This has the effect of artificially reducing the profits for corporation tax.
I'm pretty sure what A has done is illegal - I just can't find backup for my thoughts. Anybody able to shed any light on this?
Thanks.
Replies (27)
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T&F
So you are saying that the accounts (as used to calculate taxable profits) do not present a true & fair view, therefore are not compliant with UK GAAP.
In other words, a fraud...
Not saying that at all
So you are saying that the accounts (as used to calculate taxable profits) do not present a true & fair view, therefore are not compliant with UK GAAP.
In other words, a fraud...
The OP is merely asking whether there is anything improper in claiming CT relief for unpaid bonuses.
Artificially?
The OP is merely asking whether there is anything improper in claiming CT relief for unpaid bonuses.
The OP headed the query "Artificially reducing profits" which suggests there may be some evidence of improper behaviour but it's not possible to say if that is indeed what the OP meant and, if so, whether there is any firm evidence pointing to wrongdoing.
Another pertinent fact
They are also saying that the bonuses actually paid are only 10% of the accrual. If they have claimed a deduction for an accrual that is 10 times larger than the actual bonus, that is an issue, even if that actual bonus is paid within nine months. The OP is merely asking whether there is anything improper in claiming CT relief for unpaid bonuses.
Yes of course
They are also saying that the bonuses actually paid are only 10% of the accrual. If they have claimed a deduction for an accrual that is 10 times larger than the actual bonus, that is an issue, even if that actual bonus is paid within nine months. The OP is merely asking whether there is anything improper in claiming CT relief for unpaid bonuses.
Yes of course. That is why I explained to the OP what "paid" means in this context and alerted him to the fact that bonuses (or any part of them) not paid within nine months would not attract CT relief.
He may think, as many do, that a bonus credited to a loan account has not been paid.
Bonuses don't reduce "the
Bonuses don't reduce "the profits for corporation tax" unless they are paid within nine months of the year end. "Paid" includes crediting the net bonus to a loan account on which the director (as I assume the recipient is) is at liberty to draw. Also, of course, the consequence of payment is that the bonus has to be taxed through PAYE at the same time.
So what are the facts here? Were the bonuses paid (within the wider meaning of that word) within nine months or not? What do the entries in (a) the DLA and (b) the PAYE records say about when he bonus was paid?
If the bonuses were paid within nine months and not added back in the CT comps all is as it should be.
This is getting silly. When
This is getting silly. When the OP explains when, or if, the bonus has been paid we will know whether there is a problem or not. But if there is a problem it's a tax one (possible failure to add back provisions for bonuses not paid within 9 months) and not one of the more colourful and exotic problems that have been suggested above.
Shedding light
This is getting silly. When the OP explains when, or if, the bonus has been paid we will know whether there is a problem or not. But if there is a problem it's a tax one (possible failure to add back provisions for bonuses not paid within 9 months) and not one of the more colourful and exotic problems that have been suggested above.
The OP was expecting us to shed light on the illegality - I'm pretty sure what A has done is illegal - I just can't find backup for my thoughts. Anybody able to shed any light on this?
And it was about lunch time and I was shedding maximum light!!
Mmm...
If there was no legal liability to pay the bonus at the balance sheet date, then it should not be accrued for regardless of whether the amount is overstated or not.
Backed date bonuses, dividends, pension contributions are things of a distant past.
Yes of course
If there was no legal liability to pay the bonus at the balance sheet date, then it should not be accrued for regardless of whether the amount is overstated or not.
Backed date bonuses, dividends, pension contributions are things of a distant past.
But that's not the problem being suggested here. The problem being suggested is that CT relief has been improperly obtained.
Not quite
But that's not the problem being suggested here. The problem being suggested is that CT relief has been improperly obtained.
Yes but the reason CT relief has been improperly obtained is that the accounts are incorrectly prepared, not that the accounts are correct but include an amount that is improperly included for tax purposes.
Let me add my thoughts
A has added the bonus by way of accrual. A was the company accountant, I am assuming in house and not a director at this point. A has not done anything illegal he has made an accrual as we all do.
The accrual has been carried into the accounts and used in the corporation tax return, again this is not illegal.
When the bonus has been paid it was 10% of the accrued amount. At this point we do not know why it was different. Again this is not illegal, however for an accrual to be made we must be pretty sure the liability exists (cannot remember the proper term here), this is the director's duty when signing the accounts. A has not done anything illegal.
We do not know the amount of the bonus or the % of net profits it represented. If the accrual was £10K and £1K was paid you may wish to revisit the CT return and amend it, if the bonus was £1K and £100 was paid you may not want to do so.
The worst case (not knowing the figures) is that a timing advantage has been made. Using my £10K and £1K example a timing advantage of about £2K has been made.
Was A a director?
Because if he was, the bonus has, as a matter of statutory construction, already been paid and there has been a failure to operate PAYE.
There does not need to be a legal obligation to pay the bonus for it to go into the acocunts. just a constructive obligation like saying "we will pay you a bonus of £X".
But the issue is where has the "unpaid" 90% been accounted for. If credited to the DLA within nine months there is no CT issue. There may be a PAYE issue but that would be a different matter.
When the OP gets back from lunch I am sure all will be made clear and we can stop speculating and letting our imaginations run away with us.
What does it matter?
Pound to a penny that the previous accountant, A, has kicked a tax liability down the line, doubtless on the instructions of and/or with the consent of the directors through what turned out to be an enthusiastic bonus accrual.
The legal issues relating to this are long, tedious and likely utterly irrelevant as the tax liability will now be due on the reversal of the 90% over accrued. Not doubt if pressed, A or the directors will produce their workings to show how the had produced an accrual that the company had a constructive obligation to pay that in the event it, didn't.
Maybe
Pound to a penny that the previous accountant, A, has kicked a tax liability down the line, doubtless on the instructions of and/or with the consent of the directors through what turned out to be an enthusiastic bonus accrual.
The legal issues relating to this are long, tedious and likely utterly irrelevant as the tax liability will now be due on the reversal of the 90% over accrued. Not doubt if pressed, A or the directors will produce their workings to show how the had produced an accrual that the company had a constructive obligation to pay that in the event it, didn't.
Maybe 1 year later they are seeking to do it again. After all, if it was OK the first time and nothing happened, it must be OK to repeat it.
Who says that anything has been over-accrued? We haven't heard that the director doesn't want the money yet have we?
We are still waiting for the OP to get back from lunch.
What director?
Who says that anything has been over-accrued? We haven't heard that the director doesn't want the money yet have we?
Taking what the OP said a face value, there has been a 90% over accrual with no-one saying who the accrual was in respect of.
After this thread, I doubt the OP is ever coming back from lunch.
Long lunches
In my experience long lunches have an inverse correlation with good information.
My imagination is less colourful.
My bet is that 10% was paid in cash and the other 90% credited to the DLA - both within 9 months - but the OP mistakenly believes that the portion credited to the DLA is deemed for tax purpose not to have been paid. So my correction of his misunderstanding puts his mind at rest - there is no problem after all - and we can all move on to more useful things.
State of uncertainty...
My imagination is less colourful.
My bet is that 10% was paid in cash and the other 90% credited to the DLA -
Your imagination is leading you to assume that A is a director. My imagination took me elsewhere. Until OP clarifies, we are like Schrodinger's cat...
No. A is the accountant who
No. A is the accountant who has prepared the accounts the OP is worried about. That is what we are told. I am assuming that the recipient of the bonus is a director who has not been named.
Or maybe
A is is the farmer that sowed the corn, that kept the [***] that crowed in the morn, that waked the priest all shaven and shorn, that married the man all tattered and torn, that kissed the maiden all forlorn, that milked the cow with the crumpled horn, that tossed the dog, that worried the cat, that killed the rat, that ate the malt, that lay in the house that Jack built?
Bonus in Financial Statements
Hi,
Could anyone tell please where exactly we should put Bonus in Income statement?
Some saying that we have to put it after operating profit and some saying before operating profit just below the salary.
and how is the tax treatment on that?
Thanks in advance