Sitting untouched in accruals for my new small OMB client company is a £9k director's bonus accrued at year ended Feb 2012. This hasn't been paid and won't be in the foreseeable future. The bonus wasn't added back in the CT comp, filed 8 months after year end, so CT was underpaid for the year ended Feb 12.
This year's accounts will produce an adjusted loss, which I'll carry back to obtain a partial CT repayment for the previous year. I'm thinking about both the accounts and tax perspective. I'm a new sole practitioner wondering how to deal with a basic error made by a top 20 accountancy firm and best manage pragmatism, technical accuracy and new relationships. Reversing the accrual will put a big fat credit in a loss making P&L and I think transferring it to the Director's loan account equates to payment for RTI - so can't do that. £9,000 that should never have been accrued is very material for the client's accounts, let alone the CT impact. How should it be shown at Feb 13?
When the previous accountants did the annual payroll in month 12 of 2012/13, I'd hope they'd have spotted the unpaid bonus from year ended Feb 2012 and have had a plan to deal with it. Has someone dealt with similar? Please can you advise a newbie:
1) who do I tell - all 3 of client, previous accountant and HMRC?
2) what's the best solution (accounts and corporation tax) for what is in effect a cash tax timing issue, but technically wrong and we are in time to correct.
P.S. negative reserves, so no dividend (and will be evidencing going concern conclusion) Simple?
Thanks, Jim
Replies (13)
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I would add it back in the 2013 computations.
EDIT
And make sure it is paid before the end of February to get a deduction on the 2014 year.
Why not
If I debit accruals and credit DLA, have I not technically got a 'payment' under the director's remuneration rules? I can't leave it in 2013 accruals, so the only other option, short of writing back, is a credit to other creditors, just a masking action. Whatever I do it'll be by far the biggest line in the accounts, as the 2013 year's not been as good as 2012.
Yes if you credit it to the DLA you have got a payment - that triggers PAYE payment and CT relief for tbe company. Why can't you leave in accruals? Surely that is where it must stay until it is paid.
Not necessarily wrong
Was the bonus approved by the shareholders/directors.If the directors fee was voted /approved properly within 9 months of the year end, and merely has not been physically paid, the tax treatment is correct. There is legislation which states that directors fees are paid either on physical payment or when it has been approved by the directors, whichever is the earlier.
Disagree
Was the bonus approved by the shareholders/directors.If the directors fee was voted /approved properly within 9 months of the year end, and merely has not been physically paid, the tax treatment is correct. There is legislation which states that directors fees are paid either on physical payment or when it has been approved by the directors, whichever is the earlier.
Disagree that bonus is deemed to be paid when it is voted. It is paid when it is physically paid in cash or credited to an account on which the director is free to draw.
The accounting treatment is quite straightforward. Just leave the provision there until it is paid. Discuss with the client when is the best time to pay it taking into account the tax and NI that arises when it is paid and the corporation tax saving that results. For tax purposes add it back in the 2013 computations as I have suggested.
That was a fascinating read
It seems to me that this is a particular issue for single director companies and/or where the remuneration split between directors has been determined.
I have had a look at EIM42320 (3) and EIM42310 first bullet point. Would commentators agree that an accrual for a bonus payable at some point in the future where the split between directors is yet to be agreed does not meet the "paid" conditions?