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HMRC internal manual

Employment Income Manual

Employment income: basis of assessment for general earnings: the time when earnings are received: entitlement to director's earnings

Rule 2, Sections 18(1) and 686(1) ITEPA 2003

Like other employees and office holders, directors are treated as having received earnings at the time when they become entitled to be paid them (see EIM42260 and EIM42290).

There are two main ways in which directors become entitled to be paid earnings.

Entitlement arising under the terms of the company’s articles of association

Companies often adopt the provisions of Table A of the Companies (Tables A-F) Regulations 1985 to regulate the way in which directors are paid. The present regulation is 82 of Table A. Its predecessor was regulation 76 of Table A, which accompanied the 1948 Companies Act. Each of these provisions requires that directors’ remuneration should be voted in general meeting. This involves the members of the company passing a resolution that determines the amount payable to the directors.

If there is no such specific resolution, but the directors’ remuneration is approved by the shareholders entitled to attend and vote at a general meeting, this has the same effect as a resolution passed by the company in general meeting (re Duomatic Ltd 1969 2 Chancery 365). Also, a resolution of the members approving the company’s accounts will be a sufficient authorisation of directors’ remuneration if the members are aware that by approving the accounts, they are also approving the directors’ remuneration. (Felix Hadley & Co v Hadley (1897) (77LT131)).

The time at which entitlement to earnings arises is the time at which the resolution is passed, agreement reached or the accounts approved, unless specific provision otherwise is made at that time.

Entitlement under the terms of a service agreement

The second way in which a director can become entitled to earnings is by having a service agreement with the company. Such an agreement may be written, verbal or implied and may give entitlement to a regular salary or a contractual bonus or other sums according to the terms of the agreement. The director would then enjoy rights to earnings under the agreement quite separate from any rights the director may also have through the directorship. These contractual rights would not necessarily be subject to regulation 82 of Table A.

The time at which entitlement to earnings under a service agreement arises will be governed by the terms of the agreement.

All matters concerning whether a director has become entitled to earnings should be dealt with by an Inspector.