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Can you prepay a bonus?

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A client makes £100k pa profit. If profits rise to £200k next year as a result of sales staff bringing in new recurring customers then a bonus of £50k will be made at the end of next year.

If the target is met then the bonus will need to be accrued in next years accounts as there will be an obligation to pay. However, the client then wants to prepay the bonus and release over two years on the basis that the bonus benefits the company for years to come.

Aside from the fact that the clients desired treatment is not tax efficient, I feel a little uneasy about a bonus prepayment (and the accounts will be subject to audit) and would appreciate readers' comments. Thanks

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By paul.benny
25th Apr 2019 15:23

What's the client's motivation for deferring some of the bonus expense? Once you know that, you can more effectively advise on the accounting and on the tax effects.

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Replying to paul.benny:
By Mr_awol
25th Apr 2019 16:05

Probably prepping for sale and wants the increased profits but (hence the willingness to stump up a sizeable bonus) but wants to defer the cost.

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By Mr_awol
25th Apr 2019 16:03

If he's that keen to prepay it, might he consider a clawback clause in the bonus if any employees should leave within two years - reducing the clawback each month in line with the desired prepayment?

It's still a bit wet and might be counter productive, but as things stand im not convinced on any grounds for prepayment.

Alternatively, if it hasn't been put in writing already, outline the bonus structure but make it discretionary with no formal commitment to pay. That way you might be able to avoid accruing for it in the first place (better than accruing it and trying to subsequently prepay).

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By johnt27
26th Apr 2019 13:58

This is basic accountancy.

Unless the company has a right to recover the bonuses paid then there is no asset, therefore you can't prepay and release in future years.

Accruing for the bonuses and meeting the recognition criteria for a liability is disconnected from the cash transaction. What liability is there if the bonus is already paid?

The more appropriate thing to do would be to pay the bonuses in tranches or at the end of the 2 year period. You can then recognise the liability, assuming there's an expectation new customers will stay for 2 years. The corporation tax treatment would then follow normal rules depending on when payments are made. But there would still be a deferred tax charge for the full amount.

Company saves £50k cash (plus E'er NI/Pension less CT relief) now and only pays out when they've had some or all the benefit of new business. Seems like a win win all round?

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By WhichTyler
26th Apr 2019 16:53

Are you the auditor?

If not, then say 'I don't think that works because x but let's ask the auditors in case I have missed something'

The auditors will then agree with you...

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