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HMRC internal manual

Employment Income Manual

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HM Revenue & Customs
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Employment income: basis of assessment for general earnings: the time when earnings are received: crediting of earnings in the accounts or records of the company: limited scope of the crediting rule

Rule 3(a), Sections 18(1) and 686(1) ITEPA 2003 At first sight the crediting rule at

EIM42310 appears to be very wide in scope, so that any entry in the company’s records counts as payment to the director. This is not so. This is because the rule applies only when earnings are credited. An entry in the accounts or records for remuneration that is not yet earnings is not caught. Here are three examples.

1. Draft entries in accounts and recordsWhen draft accounts are prepared the bookkeeper (or the accountant) may enter a figure for the directors’ remuneration that is likely to be voted at the annual general meeting. But merely writing down a figure does not of itself create an amount of taxable earnings. In the absence of a service agreement that provides the remuneration, earnings cannot exist until the shareholders agree that they are due. Often, therefore, the earnings will be paid when voted at the annual general meeting. But the shareholders can decide that earnings should be paid, or paid on account, before the AGM (see

EIM42300).

2. Contingent earningsEntitlement to an amount that is contingent (that is, dependent) on a condition being met in the future does not become earnings until the contingency is fulfilled. For instance, a director may have a contract with a company which says the director is to be paid five per cent of the profits for the year ended 31 December 2005 provided the director is still in office on 1 November 2006. Payment is to be made on 1 November 2006 if the condition is met. The director gets nothing if he or she leaves at any time before 1 November 2006 because entitlement to the earnings is contingent on further service. It follows that earnings only come into existence for assessment purposes when the condition is met on 1 November 2006.

When the accounts to 31 December 2005 are finalised in March 2006 the directors may decide that it is prudent to include a provision for the bonus that may be payable if the contingency is met. Any such entry will not amount to payment under the crediting rule because the figure in the accounts (whatever it is called) is not yet earnings.

3. Provisions for earnings The same principles apply where a company makes a reserve or provision for earnings that may be payable in the future but that have not yet been agreed.