Article 65A: The meaning of receipt of emoluments
The rules are that a payment of income which is assessable to tax is treated as made on the earliest of the following rules (a), (b), (c) and (d):
(a) actual payment of, or on account of, emoluments, or
(b) entitlement to such payment; and, in the case of a director of a company, in respect of any office or employment he holds under that company:
(c) when the sums on account of emoluments are credited in the company’s accounts or records
(d) the end of a period, where emoluments are determined before the end of that period, or
(e) when the amount of emoluments for a period is determined, if that is after the end of that period
(c) Crediting of earnings in the accounts or records of the company
Directors very often draw money from the company during the year, which is debited to their loan account and repaid by crediting fees, or a dividend, voted or declared during the year or after the end of the year.
Where a director’s earnings are credited to an account with the company on which the director can draw, they are regarded as paid at the time when the credit is made. It is at this point that the earnings are assessable to tax and the ITIS effective rate must be applied.
(d) Director’s earnings fixed before the end of the period for which they are due
If the amount of a director’s earnings for a particular period is determined before the period ends, they are treated as being received, and paid at the end of that period.
At a shareholders’ meeting on 1 June 2006 a director is voted a bonus of £5,000 for the year ending on 31 December 2006. Determination therefore takes place on 1 June 2006 but the earnings are treated as paid on 31 December, the end of the period for which the bonus is due. The fees are income in the hands of the director for the year of assessment 2006. The ITIS effective rate applicable on 1 December 2006 must be applied against the fees voted.
Unless any earlier rule applies, such as where a director has an agreement that provides for a regular monthly salary, (a) or (b) above will usually apply before this determination rule. For example, there may be an actual payment each month or the director may be entitled to be paid each month. In that event, tax deductions under ITIS will apply each month.
(e) Director’s earnings fixed after the end of the period for which they are due
If the amount of a director’s earnings for a particular period is determined after the end of the period to which they relate, they are treated as being received, and paid, at the time the amount is determined.
A director’s fees for the year ended 31 December 2005 may be fixed on a vote at the annual general meeting on 1 May 2006. Since determination takes place after the period for which the fees are due the date of payment is deemed to be 1 May 2006. The fees are income in the hands of the director for the year of assessment 2006. The ITIS effective rate applicable on 1 May 2006 must be applied against the fees voted.
Directors’ earnings are often determined when the shareholders fix the earnings due at the annual general meeting after the year end. However, earnings can be determined on other occasions – for example when the shareholders vote remuneration at meetings other than the annual general meeting.
The date earnings are determined is not affected by the fact that accounts have not by then been prepared. If the shareholders vote a specific amount of remuneration there will be a determination of the amount of the earnings even if accounts are not prepared.
Note that the rules for (d) and (e) above apply when the directors’ earnings are determined. They are deemed to have been received, and paid, at that time, even if they are not actually paid or have not been credited in the company’s records.
Proper records should be kept to show that the correct ITIS effective rate has been applied at the proper time against directors emoluments, with a distinction being made at the time of any payments, between those emoluments subject to ITIS and directors loan withdrawals.