The disruption to businesses and employers caused by COVID-19 may have resulted in company directors considering pay reductions, waiving bonuses or whether they are eligible for the Coronavirus Job Retention Scheme (CJRS) Here we explain two important points to consider before taking any action.
During the current climate, many employees and company directors may have volunteered to receive less pay or a bonus during the crisis to help the business financial position. However, if not structured properly, the income tax and National Insurance contributions (NICs) due on the amount of pay that is forgone could still be due.
Typical employees are entitled to their salary on the dates set out in their contract or agreement with the employer. However, the rules for directors are different. The date at which directors are entitled to income is the point at which it is determined – this can be a credit in the company accounts or records, such as meeting minutes, or as a result of a service agreement between the director and the company.
Generally, if pay is waived after entitlement to it has occurred, income tax and NICs liabilities are still due on amounts that employees waived. Therefore, if an agreed contractual variation is not in place before the employee or director is entitled to receive their salary, they will still be entitled to the full amount. In turn, this means that the income tax and NICs should be calculated on the original amount, not the reduced salary that is actually paid. The same issue could arise when an employee waives or defers their right to a bonus without a supporting agreement to do so.
If the amount of pay is determined before (or without) an agreed variation of contract, the income tax and NICs due should be calculated on the full amount of pay. This is likely to impact on many company directors whose entitlement to the pay may have been determined some time before it was due to be paid.
Some employees or directors might think that an alternative would be to repay bonuses they have recently received to help the business financial position. However, this is also extremely inefficient for tax purposes. The current rules mean that tax relief will not be due on the amount repaid and so the bonus would have to be repaid from post-tax income and not as negative earnings.
It is yet to be seen as to whether HMRC will take a relaxed attitude to these rules, but the last thing any organisation needs following this period of disruption is an additional tax bill, with interest and penalties, or – at best – an extremely inefficient arrangement.
It is imperative to ensure proper deferment and/or waiver agreements are put in place and procedures followed when employees offer or agree to receive reduced pay during these times.
Many people will be aware that company directors can be furloughed and qualify for the CJRS which has now been extended until the end of October. Many will also be aware that the amounts that can be claimed for under the scheme will be based on the amount of pay that is processed through PAYE only.
These rules mean that any owner-manager directors will not be able to include any dividends in the amount that can be claimed from the government. However, there is yet worse news for company directors who are paid annually.
Employees or directors are only eligible for the CJRS if they are included on a Real Time Information (RTI) submission on or before 19 March. But the key point is that the RTI submission must relate to a payment for the 2019/20 tax year.
More details can be found in our insight Support for employers during the COVID-19 pandemic.
Many directors who are paid annually are paid every year at the end of March. Where this is the case, the 2019/20 payment would not have been submitted to HMRC by 19 March 2020, and the previous payment would not have been in the 2019/20 tax year. Therefore, these directors will not qualify for the scheme.
If a company director is paid annually, it is important to check the dates on which the RTI submission for the 2019/20 tax year was submitted. If this was after 19 March 2020 it is unlikely that the company director will be eligible for the scheme.
If you require any assistance with your employment tax obligations, please contact your usual Crowe contact.