Directors Remuneration

Introduction

Tax Briefing Issue 43 included an article on the treatment of the short tax year and Company Directors. The purpose of this article is to provide further clarification following enquiries received from practitioners. The article also contains some useful examples.

Directors chargeable on the Accounts Basis

The following administrative arrangement only applies to directors who have traditionally submitted returns on the accounts basis.

Historically, the accounts basis has been accepted to overcome the difficulties with apportionment of accounting period figures and possible notional underpayments arising, and on the basis that taking one year with another there should be no overall substantial difference between the figures assessable and those assessed.

The basis of computation of directors’ remuneration, which is acceptable for tax purposes, is as follows: -

A company’s accounting period of one year ending within a year of assessment may be taken as the equivalent of that year of assessment for the purposes of computing liability under Schedule E. In effect, the remuneration computed by reference to the company’s accounts year may be treated as payable for the tax year in which the accounts year ends, and need not be apportioned.

A typical example of the position, which prevailed, is set out hereunder.

A/P	Directors Remuneration charged	Year of assessment	Assessable figure
31/1/1998	₤160,000	1997/98	₤160,000
31/1/1999	₤180,000	1998/99	₤180,000
31/1/2000	₤200,000	1999/00	₤200,000

Short Tax Year

With the introduction of the changes in the Finance Act 2000 and the changeover to the short tax year, transitional arrangements as set out in Tax Briefing Issue 43, are necessary for the year of assessment 2001. The amended position is set out hereafter.

Example 1

Accounting Periods ending between 1 January and 5 April

A/P	Directors Remuneration charged	Assessable	Assessment
31/1/2001	₤160,000	2000/01	₤160,000
31/1/2002	₤180,000	2001	₤133,200*
		2002	₤180,000+
31/1/2003	₤200,000	2003	₤200,000

*As there is no A/P ending in the period 6/4/2001 to 31/12/2001, 74% of the remuneration charged in the company accounts ending in the period 6/4/2001 to 5/4/2002 is the amount assessable for the short tax year.

The PAYE tax credit for offset against the remuneration assessable in the short tax year will be the PAYE tax actually deducted (if any) and remitted for the period 6/4/2001 to 31/12/2001.

+ The PAYE tax credit for offset against the remuneration assessable in the year 2002 will be the PAYE tax actually deducted and remitted for the period 1/1/2002 to 31/12/2002. As this may, in some cases, only amount to 26% of the tax due on the remuneration assessable for the tax year 2002, practitioners should ensure that sufficient preliminary tax is paid for 2002 to address any shortfall.

Example 2

Accounting Periods ending between 6 April and 31 December

A/P	Directors Remuneration charged	Assessable	Assessment
30/4/2000	₤160,000	2000/01	₤160,000
30/4/2001	₤180,000	2001	₤133,200*
30/4/2002	₤200,000	2002	₤200,000
30/4/2003	₤220,000	2003	₤220,000

*The A/P ended 30/4/2001 forms the basis period for the short tax year and 74% of the profits for the year ended 30/4/2001 are assessable in the year 2001.

As previously advised, this is purely an administrative arrangement that is not intended to create a tax advantage. The strict statutory position will be applied by Revenue in cases where the application of this arrangement would give rise to a tax advantage.

Example 3 - Revision to Strict Statutory Basis

A/P	Directors Remuneration charged	Assessable	Assessment
30/6/2000	₤160,000	2000/01	₤160,000*
30/6/2001	₤1,500,000	2001	₤1,110,000*
30/6/2002	₤200,000	2002	₤200,000
30/6/2003	₤220,000	2003	₤220,000

* The application of the administrative arrangement gives rise to a tax advantage. Therefore, the strict statutory basis is applied and the assessments are revised as follows: -

A/P	Directors Remuneration charged	Assessable	Assessment
30/6/2000	₤160,000	2000/01	₤1,165,000*
30/6/2001	₤1,500,000	2001	₤475,000*
30/6/2002	₤200,000	2002	₤200,000
30/6/2003	₤220,000	2003	₤220,000

* 2000/01	₤160,000 × 3/12 =	₤40,000
	₤1,500,000 × 9/12 =	₤1,125,000
		₤1,165,000
2001	₤1,500,000 × 3/12 =	₤375,000
	₤200,000 × 6/12 =	₤100,000
		₤475,000