PAYROLL - 24.02.2010

Provisions for bonuses

Year-end. March 31 is the most popular accounting year-end, partly because it ties in with the PAYE year-end. If it’s your company’s year-end, then you should now be considering whether there is anything you need to do to reduce the profits on which your company pays tax. One thing to consider is whether any bonuses should be voted to directors or staff and, if so, when these should be paid to ensure the company gets the tax relief.

Nine months later. The good news is that you can claim tax relief for bonuses paid to directors and staff before you’ve actually paid them. The rule is that the remuneration etc. has to be paid within nine months of the year-end to get tax relief at the year-end. However, what some companies fail to realise is that there’s another requirement in order to get the tax relief.

Must be an obligation at year-end. Under Financial Reporting Standard 21 (FRS 21), bonuses for employees or directors declared after the year-end may only be accrued in the accounts if there was a “legal or constructive obligation at the balance sheet date” to make such payments. All other bonuses declared after the year-end can’t be included until the following year. How do you do this?

Example. A company makes accounts up to March 31. The directors hold a formal board meeting before the year-end, at which it is minuted that £100,000 will be payable to the directors as remuneration following the finalisation of the accounts. Because this is a formal decision, it becomes a liability of the company, which means you can put in a provision of £112,800 (the £100,000 plus the 12.8% employers’ NI) in the year-end accounts. The Corporation Tax is correspondingly reduced.

Trap. Be careful not to trigger “payment” of remuneration (and liability to pay PAYE and NI) by being too definite about who is to receive it. The answer is to put a general provision for bonuses that is non-specific between individuals.