Sarah Bradford outlines the rules for securing a corporation tax deduction for director’s remuneration unpaid at the year end, and takes a look at the associated implications for PAYE.
It is commonly the case that a company will hold its annual general meeting after the year end and approve a director’s final remuneration or vote a bonus for that year. Where director’s remuneration for an accounting period is paid in that period, the corporation tax position is straightforward – the company is generally allowed a deduction for that remuneration when computing its profits for corporation tax purposes. However, where the remuneration is unpaid after the end of the year to which it relates, the position is slightly more complicated.
Nine-month rule
The basic rule is that where an amount is charged in the accounts in respect of employees’ or directors’ remuneration and that remuneration is paid within nine months of the end of that accounting period, it is deductible in computing the profits for that accounting period (as long as all other conditions for deductibility are met).
Example 1: The ‘nine-month rule’
A company prepares accounts to 30 September each year. On 1 December 2015, it held its annual general meeting at which the director was voted a bonus of £10,000 in relation to the year ending on 30 September 2015. The bonus was paid in cash on 28 January 2016.
As the bonus was paid within nine months of the year end, it is deductible in computing the company’s profits for the year to 30 September 2015.
In the event that any remuneration unpaid at the year-end is paid more than nine months after the end of that year, the deduction is given for the accounting period in which it is paid, rather than for the year to which it relates
When remuneration is `paid’
The definition of `paid’ is not simply when the cash is transferred to the director. The rules that apply to determine if the unpaid remuneration has been `paid’ within nine months of the year end for securing a corporation tax deduction are broadly the same rules as apply to determine whether a payment has been made for PAYE purposes (thereby triggering the PAYE liability). The date of payment is earliest of the dates determined the following rules.
Rule 1
The time when the payment is made of or on account of earnings.
Rule 2
The time when a person becomes entitled to a payment on account of the earnings.
Rule 3
If the employee is a director and the earnings are from employment with the company of which the employee is a director (or was at any time during the accounting period), the earliest of:
- the time when sums on account of the earnings are credited in the company’s accounts (whether or not there is any restriction on the right to draw the sums);
- if the amount for a period is determined by the end of the period, when the period ends; and
- if the amount of the earnings is not determined under after the end of the period, the time when the amount is determined.
If the employee is not a director, rule 3 does not apply and the payment date is the earlier of the dates determined by reference to rules 1 and 2.
Trap:
The date on which PAYE is due may be earlier than the date on which the director actually receives the remuneration or bonus.
Example 2: When is the bonus ‘paid’?
In the example above, the bonus for the year to 30 September 2015 was determined on 1 December 2015. It was credited to the director in the company’s accounts on 30 December 2015 and the director became entitled to it on that date. It was paid to the director on 28 January 2016.
Applying the above rules, the bonus is regarded as `paid’ on the earliest of:
- 28 January 2016 (date paid – rule 1);
- 30 December 2015 (date director became entitled to it – rule 2)
- 1 December 2015 (date remuneration determined – earliest of rule 3 dates).
As the employee is a director, rule 3 applies and the bonus is treated as paid on 1 December (the date on which it determined). It is deductible for corporation tax purposes as it is paid within nine months of the year end. However, the PAYE liability is also triggered on 1 December, even though it is not paid until January.
Practical Tip:
Determining a bonus or paying remuneration within nine months of the year end can secure a corporation tax deduction for the year to which is relates, but will also trigger the associated PAYE liability.
