Accrued director's bonus - still unpaid

Accrued director's bonus - still unpaid

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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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By johngroganjga
17th Oct 2013 16:19

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.

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By JimH
17th Oct 2013 18:35

And in the accounts?
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.

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Replying to MGD:
By johngroganjga
17th Oct 2013 22:58

Why not

JimH wrote:
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.

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By mhtax
17th Oct 2013 21:54

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.

 

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Replying to NH:
By johngroganjga
17th Oct 2013 22:12

Disagree

mhtax wrote:

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.

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By johngroganjga
17th Oct 2013 21:59

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.

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By User deleted
17th Oct 2013 22:48

I disagree, John (and agree, Basil and mhtax)

See CTA 2009 s1289(4)

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By JimH
17th Oct 2013 23:00

Thanks for help - as I'm very new to RTI...
... I'm wondering what the position is if the bonus is, in fact, deemed 'paid' under the director rules*. Hasn't a £9k bonus accrual meant the amount has been determined and so 'paid?' Should 'paid' trigger a payslip? This pre-dates the RTI regime ... or does it, johngroganjga? When would an FPS be due?

* the 'earliest of' rules for directors' PAYE http://www.hmrc.gov.uk/manuals/eimanual/eim42260.htm

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By JimH
17th Oct 2013 23:10

Sorry guys, our posts crossed
Your references to when directors are paid, beat mine onto the site. Thank you.

So I should be looking up penalties for late PAYE?

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By JimH
18th Oct 2013 12:39

Just about there on the technical, I think?

Thank you ... though I think it's for bad news, I'll not shoot the messengers, but ask the practical steps please:

Thanks Basil and BKD - for the legn and guidance.  I don't think it's a choice to acknowledge, fawltybasil - I've revisited CTA 2009 s1289(4) & ITEPA s18.  I've also checked out bonus 'waiver' and found page 9, which says NIC is due.

I think these are the practicalities: 

Stat accounts dated October 12 included Director's bonus in operating profit note, therefore bonus must be deemed paid for PAYE in 2012/13 thoughIf client can evidence that bonus was waived by 5 April 2013, I think NIC was still due, but Director's 2012/13 original self-assessment would stand (tax reverses)?  So the filed P35 was incorrect and Director's self assessment may be? (thanks Basil)Director is in time to amend SA if neededpenalty for incorrect P35 under the careless unprompted regime for 100% underpaid tax and NI.  If bonus was waived by 5 April 13, tax may not have been due, but NIC will have beenaccounts y/e Feb 13 - may as well transfer out of B/S accrual to DLA - unless formally waived (latter brings fat credit to P&L)tax - as bonus is deemed 'paid' the deduction in 2012 comp is fine

And not least - do I or the client approach previous big firm accountants to deal with prior year tax and P35 issues - and pick up any fines?  Diplomacy tactics? - first time I've met a scenario like this.

Thank you, to the great and more experienced, for leading me along the right path.

Jim

P.S  So another conclusion I reach - you can't accrue director's bonuses when preparing accounts and maintain an annual scheme, unless all annual payroll is on bonus 'paid' day! 

 

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By paulwakefield1
18th Oct 2013 10:07

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?

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Replying to Ruddles:
By JimH
18th Oct 2013 19:09

Useful addition to the commentary
Thanks Paul for highlighting an advantage for 2 director companies - one reason for our clients to add the spouse?

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By JimH
18th Oct 2013 19:13

Great technical stuff
... as always, excellent knowledge pointers. Thank you! Love to hear the 'soft skills' response to managing such situations - are we good at that too?

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