A little-reported change in accounting rules has altered the way HM Revenue and Customs look at bonuses given to company directors and will affect many smaller companies.

Traditionally, it was normal to decide on the bonus level to accrue in the company’s accounts based on the draft year end accounts. These are normally only available some weeks after the end of the financial year. Once the level of profit was known, the bonus would be decided and the appropriate accrual put in the accounts, allowing corporation tax relief to be obtained on the bonus payment in that tax year, provided the bonus was paid within nine months of the year end.

Under current accounting rules, a bonus can only now be accrued if the company has the legal obligation to pay it at the year end. The precise sum need not be known, but the bonus must be declared prior to the year end to be claimable against that year’s profits.

The PAYE on a bonus to a director is payable on the earliest of the following:

• the payment of the bonus;
• the director becoming legally entitled to the receipt of the sum;
• when the payment is credited to the director in the company’s books of account; or
• when the amount of the bonus is fixed.

This means that the voting of a bonus of (say) ten per cent of the profit before tax would not result in a PAYE liability until that figure were known. The rule requiring the payment to be made within nine months of the year end in order to be deductible for corporation tax purposes in that year still applies.