Let’s take an example…
Rodney supplies medical equipment and operates through a family partnership. Historically the business has jogged along with moderate income. When Covid – 19 came along Rodney was able to source different suppliers and made some serious money in the accounting year ended on 31 December 2020.
By May 2021 Rodney’s situation had stabilised but his annual accounts were showing substantial profits which could only mean one thing-very high tax rates. So he decided to pay out surprise bonuses to staff totalling £40,000, relating to the year ended 31 December 2020.
Of course Rodney could have paid these bonuses out earlier but he had serious cash flow problems. He was quite aware that he could redress the situation within nine months of the accounts year end.
These bonuses reduced Rodney’s 2020/21 taxable profits by £40,000 but for all payroll purposes they had to be treated as having been made in the 2021/22 tax year.
One further point. HMRC have the statutory right to disallow excessive remuneration which sometimes happens when family members are employed. As always there should be some commercial justification for unusual transactions. It is good practice to record these with a date. A covering letter to each employee in the above example would have been ideal. There is nothing like good, solid evidence to support a claim.
Do you or your staff deserve a reward? Talk to us today to ensure that you make it in the most tax efficient manner.