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The problem in a nutshell                                                            The recommendations
                                              Those that provide evidence of
On application of FRS 21, bonuses              conditions that existed at the        1. Consider whether there is a long-
agreed after the balance sheet date            balance sheet date for which the         standing practice of making
may only get corporation tax relief in         entity shall adjust the amounts          additional bonus payments once
the period in which they are paid.             recognised in its financial              the profits levels are established,
                                                                                        which can be demonstrated to HM
                                               statements or recognise items that
Profits must accord with                       were not previously recognised           Revenue & Customs.
UK GAAP                                        (“adjusting events”).                 2. If 1 above cannot be relied upon,
When calculating taxable profits of a         Those that are indicative of             make a written agreement before
trade/profession/vocation, the profit                                                   the year end that additional
                                               conditions that arose after the
must be computed in accordance with                                                     remuneration will be paid after the
                                               balance sheet date for which the
generally     accepted     accounting          entity does not adjust the               year end, once the final profit
practice, subject to adjustments               amounts recognised in its                figures are known, in order to
required under tax law (s42 FA                 financial    statements   (“non-         achieve a desired result, e.g. to
1998).                                         adjusting events”).                      clear directors‟ overdrawn loan
                                                                                        accounts or to minimise the effect
FRS 21 (IAS 10) „Events after the                                                       of the marginal rate of corporation
balance sheet date‟ has replaced                                                        tax without leaving the company
SSAP 17 „Accounting for post               The issue                                    short of funds.
balance sheet events‟. It specifies the    In addition to the adjusting events
accounting treatment to be adopted                                                   3. Notwithstanding the position under
                                           defined above, SSAP 17 allowed for           1 and 2 above, it is always
for events occurring between the           adjustment for certain post balance
balance sheet date and the date when                                                    advisable to ensure bonus accruals
                                           sheet events (that would otherwise be
the    financial      statements    are                                                 are accounted for as specific
                                           non-adjusting events) because it was         creditors (i.e. crediting the net
authorised for issue.                      customary accounting practice to             amount to directors‟ current
The FRS is mandatory for accounting        recognise them in the accounts.
                                                                                        accounts and the tax and NIC to a
periods beginning on or after 1            Therefore, even though there may not         PAYE creditor account) otherwise
January 2005 for all entities other        have been an obligation to pay               a provision for the gross bonus will
than those applying the Financial          bonuses at the balance sheet date it is      probably fall under FRS 12
Reporting Standard for Smaller             customary practice to reflect in the         „Provisions, contingent liabilities
Entities (FRSSE). However, where           accounts bonuses agreed post year            and contingent assets‟ as well.
an issue is not specifically covered by    end. This relaxation of the rules for        Challenges that provisions are non-
the FRSSE, accounting standards and        customary practice does not appear in        FRS 12 compliant are becoming
UITF abstracts should be viewed as a       FRS 21.                                      increasingly      popular      with
means of establishing current                                                           Inspectors. Although, following
practice. Therefore, it is unlikely that   Therefore, to recognise an accrual for
                                                                                        the advice in 1 and 2 above should
the use of FRSSE will provide a let        a director‟s bonus against taxable
                                                                                        provide a robust defense against a
out.                                       profits it must be demonstrated that
                                                                                        challenge under FRS 12 that there
                                           the     bonus    was     appropriately
FRS 21 sets out the recognition and                                                     was not a present obligation at the
                                           authorised at the balance sheet date,
measurement requirements for two                                                        balance     sheet     date,   costly
                                           i.e. there was a legal or constructive
types of event after the balance sheet                                                  correspondence can be avoided by
                                           obligation to pay the bonus.
date:                                                                                   removing the bonus from the remit
                                                                                        of FRS12 altogether.
Additional tests
Passing the FSR 21 test is, of course,
not the end of the story. As before it
will still be necessary to consider:
    whether the bonus was wholly
     and exclusively for the purpose of
     the trade (s74 ICTA 1988); and
    whether the bonus has been paid
     within 9 months of the end of the
     accounting period (s43 FA 1989).

    If you have any queries about this or any
    other direct tax matter, please contact
    Stephen Willcox, Peter de la Wyche,
    David Blake, Sarah Foster, Susan Butler
    or Ian Roberts at The TACS Partnership
    on 0161 429 0006 at

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