I've inherited a situation where a Ltd Co in its first year has made a profit smaller than the Personal Allowance.
The proposal is to declare director's salary at the Personal Allowance level and create a loss and negative net assets. Loss to be c/f against next year's profits presumably, and a 'going concern' note required.
Doesn't seem right. Salaries are supposed to be paid yes?, but are frequently credited to the DLA - is this classed as "payment"?
Feeling a discomfort, I would have thought they would have made a law about this.
Replies (31)
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Yes crediting a net salary to the DLA constitutes payment. What in this sequence of events do you think should be unlawful?
Credits to DLA
Credit to the directors loan account is classifiable as payment. This is accepted by HMRC as well.
Paying the salary now makes use of the director's personal allowance for the year, enabling them to take funds out later without tax consequence. As it will be the DLA that puts things into negative territory, a note saying the director will not seek repayment until the company has funds available should suffice. It is only if the company is underwater even before putting the salary through
Your issue is RTI. Unless the salary was paid and reported before 5/4/2014, it is too late to get it in for that year. Salary to personal allowance means salary above LEL and reportable under RTI.
EDIT : I am assuming the "unlawful" concern was creating a deductible expense related to the shareholder/director without an actual payment. This is distinct from external creditors, where chasing the company for payment is outside the director's control.
NI Secondary Threshold
There is nothing to stop this but is the company registered for PAYE? Paying up to the personal allowance will mean NI is payable. The NI Secondary Threshold for 2013/14 was £7,696 per year.
I'm confused
Has the company's first accounting period already ended?
If so then the salary will presumably be credited to DLA in tax year 2014/15 and in the company's current (i.e. second) accounting year. So the company will be showing a (small) profit in its first year & positive net assets in the Balance Sheet.
David
Bonus
Has the company's first accounting period already ended?
If so then the salary will presumably be credited to DLA in tax year 2014/15 and in the company's current (i.e. second) accounting year. So the company will be showing a (small) profit in its first year & positive net assets in the Balance Sheet.
David
I assume what the OP means is that he company is going to vote a bonus now for the previous accounting period. It will be in accruals in the balance sheet and then credited to the DLA now when voted, which of course triggers the PAYE entry and the NI liability.
Why do you say that the director's salary has created the loss? More likely it's not selling enough widgets that's done it!
Surely
in EVERY company that makes a loss the directors' salaries have contributed to that loss, often a bone of contention when negotiating with workers that 'times are hard'!
Surely
in EVERY company that makes a loss the directors' salaries have contributed to that loss, often a bone of contention when negotiating with workers that 'times are hard'!
So have the workers' wages. What's the point being made ?
No problem here. Move on.
I touched a nerve obviously!
One point being made is that directors' remuneration contributing to losses is commonplace. The other, that seemed to touch the nerve, is that the directors have control over what they are paid whereas the workers do not!in EVERY company that makes a loss the directors' salaries have contributed to that loss, often a bone of contention when negotiating with workers that 'times are hard'!
So have the workers' wages. What's the point being made ?
No problem here. Move on.
Nerve
One point being made is that directors' remuneration contributing to losses is commonplace. The other, that seemed to touch the nerve, is that the directors have control over what they are paid whereas the workers do not!in EVERY company that makes a loss the directors' salaries have contributed to that loss, often a bone of contention when negotiating with workers that 'times are hard'!
So have the workers' wages. What's the point being made ?
No problem here. Move on.
Fair point. Although the directors often have different pressures restricting their pay.
No offence taken.
Decision time
If a decision is being made only now to vote a bonus, can that be an accrued expenditure at the year end (in February 2014)?
I appreciate the size of the bonus may be based on the company's profits for the year to February 2014, but that alone does not make it an accrued expense at that year end does it?
David
A bonus is an accrual if it is a reward for services rendered during the past period. I don't think it's too complicated really.
If you credit the DLA at 28 February you ipso facto create an underpayment of NI on 19 March. Client won't thank you. The right way is what I explained above. It's in accruals until voted (i.e. decided upon). The conversation has moved to bonus because that is what it is. Your client chose to take no salary but now, quite reasonably, wants a bonus.
Are you suggesting backdating ....
.... after the end of an accounting period?
Each time a client wants me to re-write history where no discussion or decision had been made before yearend, I turn to my PAYE course notes from the esteemed Rebecca where I scribbled and highlighted the gem (paraphrased): get the formalities right at the time: reserve the entitlement to allow the inclusion in accounts for CT deduction - provided paid within 9 months. Don't trigger PAYE under RTI by specifying the amount; simply reserve the right to pay an amount to be determined at a later date dependent on ...
If the client didn't think of it in time, don't rewrite history.
Another thread of interest https://www.accountingweb.co.uk/anyanswers/question/accrued-directors-bo...
So the rest of the profession, apart from your good self Basil, has been getting it wrong for all these years.
The rewards to be given at a later date for services rendered during a period, are by definition a liability at the balance sheet date.
I was wondering if IAS 19 applied?
Para 19.17
An entity shall recognise the expected cost of profit-sharing and bonus payments under paragraph 10 when, and only when:
(a) the entity has a present legal or constructive obligation to make such payments as a result of past events; and
(b) a reliable estimate of the obligation can be made.
A present obligation exists when, and only when, the entity has no realistic alternative but to make the payments.
It seemed to me that was not the case at the year end.
This seems consistent with IAS 37.14 to 22.
Para 37.18
Financial statements deal with the financial position of an entity at the end of its reporting period and not its possible position in the future. Therefore, no provision is recognised for costs that need to be incurred to operate in the future. The only liabilities recognised in an entity’s statement of financial position are those that exist at the end of the reporting period.
David
Ever the diplomat @David
It is difficult when new clients come after company year end from much larger (and top x) firms and say they haven't thought about it yet, but it doesn't matter does it as it's always been dealt with as an afterthought.
Thanks for the IAS 19 & 37 refs; FRS12 has served well. But nothing beats actually bothering to dig out and quote chapter & verse.
My view is that bringing in a director's bonus paid within 9 months of the APE is more a provision than an accrual.
Provisions can be made for obligations that are created as a result of events that occurred within the trading period but will be incurred after the end of the period.
That's why we bring in a CT provision, a bad debt provision, an accountancy provision, audit fee provision etc. They do not exist at the balance sheet date but are obligations to be met in the future based on the trading activity of the company up to the balance sheet date.
I can't see anything in the BIM that suggests that an actual contractual oblligation has to exist at the end of the AP for a company to claim a bonus paid after the balance sheet date. It's only the 9 month rule that comes up.
Therefore, in my view, if the bonus relates to the director's performance during an APE then the bonus belongs in the accounts for that AP. Why he's getting a bonus for making a loss is neither here nor there - the company may have made an even greater loss without the input of the skills of the particular director - who knows.
This is unlike beneficial loans where there has to be an existing contractual obligation for a director to pay interest on a loan at the time the loan is made in order to avoid some or all of the BIK charge and you can't just go that route after the event to avoid the BIK.
@Triggle
I would suggest that a provision for bad debts simply reflects the value of an asset (debtors) which are an asset of the company at the year end (although the provision may be based in part on information received after the year end concerning the valuation of that asset which existed at the year end).
The provisions for corporation tax & accountancy / audit fees reflect liabilities to meet costs which the entity had at the year end no realistic alternative but to meet (although actual payment was not due by the year end).
But if the OP's client is only proposing NOW a bonus payment for the year which ended on 28 February 2014 (which was actually the company's first year of operation) then that bonus is NOT a cost which, at the year end, the company had no realistic alternative but to meet.
As you put it "Provisions can be made for obligations that are created as a result of events that occurred within the trading period but will be incurred after the end of the period". I would broadly agree with that. But no event occurred within the trading period which created an obligation to pay the director a bonus.
If this was a company which habitually paid staff bonuses after each year end based on the profit for the year, then one could argue that the company at the year end had no realistic alternative but to pay a bonus. But that is not the case with this company.
So an accrual for the bonus can only be made in the accounts for the year ended 28 February 2014 with a little help from the time-travelling Dr Who and some re-writing of history, IMHO.
The point is one of generally accepted accounting practice. Since tax treatment follows GAAP (except when it doesn't) then the CT treatment follows the accounting treatment (i.e. no deduction in the year ended 28 February 2014).
David
Overplayed
The provisions for corporation tax & accountancy / audit fees reflect liabilities to meet costs which the entity had at the year end no realistic alternative but to meet (although actual payment was not due by the year end).
But if the OP's client is only proposing NOW a bonus payment for the year which ended on 28 February 2014 (which was actually the company's first year of operation) then that bonus is NOT a cost which, at the year end, the company had no realistic alternative but to meet.
I'm not sure I agree with that analysis. Following that logic, if there's an accountant on the board, capable of producing the accounts, there can be no accrual for accountancy costs.
It seems an over-restrictive interpretation to me.
I think John is right (as usual)
All company directors do the job because they intend to pay themselves for their services. Thus there is a constructive obligation to pay a salary and/or bonus. That obligation exists at the year end. The fact that the amount of the bonus can only be determined after the year end (when the accounts are prepared) does not alter that - it is simply using post balance sheet events to determine the amount of a liability that exists at the year-end (as we do with bad debt provisions, telephone accruals, etc.).
What post balance sheet events?
Bad debt provision only uses evidence after the year end if this is indicative the debt was bad at the year end. As for accruals, these are not using post balance sheet events at all. What they are likely to use is information received after the year end. So if your year end is 31 March and you receive a quarterly bill to April, you accrue two thirds of that telephone bill. But, assuming even usage, if you had terminated your telephone line at 31 March instead you would have received a 31 March bill for two thirds of the amount. The cost has been incurred before the year end, the only "post balance sheet event" is the arrival of the bill to confirm what that cost is. it is simply using post balance sheet events to determine the amount of a liability that exists at the year-end (as we do with bad debt provisions, telephone accruals, etc.).
In fact, unless they provide evidence of a liability at the year end, post balance sheet events should not be adjusted at all. That is a basic accounting concept.
Going back to the salary, what post balance sheet event has occurred anyway. The director has realised they should have put something through. They did not decide before the year end to put something through. First year so no precedent for salary to be paid. Planning to be more than the available profits, so even arguing you had to wait after the year end to use profits as part of the calculation makes no sense. Very thin ice indeed.