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Regular Director bonus

Regular Director bonus

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I've just taken on a client where in the previous year there was a director's bonus that was equal to the following 9 months salary payments which fall in the accounts I am now preparing.

Looking at the figures in older accounts it would appear this is a regular thing, so every year the company has accrued for the salary that is equal to the salary paid out in the following 9 months. All the payments are at the maximum salary level without any PAYE/NI being payable.

Obviously the bonus has therefore been processed for PAYE/RTI within 9 months of the year end.

This currently leaves me with either the equivalent of 3 months salary in the accounts, or no doubt a discussion with the client where they will state there is a bonus due at the year end of the exact amount of the next 9 monthly salary payments. 

Are there any reasons why this isn't acceptable?

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Euan's picture
By Euan MacLennan
06th Mar 2015 10:53

Please clarify

Are you saying that the director takes salary in the ordinary way for the first 3 months of the year, but then nothing for the next 8 months until paying himself a "bonus" equivalent to 9 months of salary in the last month of the year?  Or that he takes a regular salary for 3 months, then pays himself a bonus equivalent to the next 9 months of regular salary in Month 4, but nothing for the rest of the year.  Or that he takes a regular salary every month and then pays himself a bonus equivalent to 9 months salary in the last month of the year - 21 months of regular salary in total?

What do you mean by the bonus being processed for PAYE/RTI within 9 months of the year-end?  PAYE/RTI should be processed when the bonus is paid (or credited to the DLA).

And you said that all the payments are at the maximum without any PAYE/NI being payable, so the salary/bonus cannot amount to very much.

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By Wanderer
06th Mar 2015 11:09

I'm reading it as:-

1. Same(ish) regular salary paid month in month out under PAYE / RTI.

2. Company's year end accounts accrue the following 9 months' salary.

OP's question bearing in mind the reference to 9 months is probably 'Is this allowable for Corporation Tax in the year in which accrued?'

 

 

 

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By TTID
06th Mar 2015 11:56

To clarify

Wanderer has it right,

There are only 12 monthly wage payments run through the PAYE in the year and this year all are at £640.  In the previous year accounts an accrued bonus is shown as £5760.

The accrued bonus is presumably therefore settled by the first 9 monthly payments in the current year accounts, hence leaving the accounts with a P&L charge for 3 months salary subject to another bonus

 

 

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Euan's picture
By Euan MacLennan
06th Mar 2015 13:16

In that case ...

This would appear to be a cunning plan to advance £5,760 of expenditure into the previous year in order to obtain corporation tax relief a year earlier.

If a salary is being paid every month, I don't think that it is valid to accrue for 9 months of it into the previous year (or at least, if you are going to accrue for it, you should recognise the corresponding prepayment).  It is up to you whether to knock this nefarious practice on the head and tell the client that only 3 months of salary will be charged in the current year.

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By Wanderer
06th Mar 2015 13:32

To the OP

This all stems from the interpretation of CTA 2009 Sections 1288 & 1289. Have a look at that.

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By TTID
06th Mar 2015 15:00

Thanks to you both,

Euan,

I totally agree it is a cunning plan to advance expenditure to obtain CT relief sooner.

However, is it allowed?

My experience tells me it's not really a bonus and hence my intention I to only include 3 months salary as you say. (Also why I've posted the question as it does not seem right).

But is there any HMRC (or other) guidance or legislation that rules it out, so that if the client says "Ok I'm due a £5760 bonus at the end of the current year" I can point at it and say no you can't?

 

Wanderer

I've looked at sections 1288 & 1289 and they do not seem to rule it out.

 

Thinking out aloud now, the problem with this is that each year there would be no salary for 9 months of the year (as the monthly "salary" payments are deemed the previous year bonus) so the director is only paying himself for 3 months work each year plus then an annual bonus.

 

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Replying to bob_the_apple:
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By Wanderer
06th Mar 2015 15:57

Sections 1288 & 1289

TTID wrote:
Wanderer

I've looked at sections 1288 & 1289 and they do not seem to rule it out.

Yes, this is why I brought them to your attention. It is where the policy that your client has adopted is rooted. Sections 1288 & 1289 state what ISN'T allowed for CT. Therefore is it reasonable to conclude what has happened IS allowed? Note the word bonus isn't used at all in the sections, it only refers to remuneration.

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RLI
By lionofludesch
06th Mar 2015 16:08

Allowable

I wouldn't be comfortable with it myself but - provided there are minutes in place showing that such a bonus was declared - I reckon that, technically, it's allowable.

Having said that - be prepared for some interesting questions if HMRC get wind of it.

And, of course, at the end of the day, it's only a timing difference.  One day, the stagger will unwind.

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By andy.partridge
06th Mar 2015 16:25

Drawing the line

It might be acceptable if at the year-end there was an obligation on the company to award the bonus, evidenced by contemporaneous minutes.

If instead, several months later, there is a notion of backdating a bonus I for one would not be complicit.

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RLI
By lionofludesch
06th Mar 2015 16:40

Agree with Andy.  The reality is that the decision probably wasn't made before the year end.

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Maytuna
By DJKL
06th Mar 2015 17:47

Seems an awful lot of work for a cashflow advantage of probably 20% of £5,760., namely £1,152

Also cannot see the advantage of running it back out monthly given it is for a director, NI will be cumulative anyway so why not just process in one go the £5,760 in the ninth month, less payroll work?

The SSAP2  type ramifications of matching cost to accounts surely depends on the record as to what is being paid and for what purpose.

Or am I missing something obvious here?

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