SE42320 - Emoluments from offices and employments: basis of assessment - the time when an emolument is received - crediting of emoluments in the accounts or records of the company - limited scope of the “crediting” rule

Section 202B(1)(c) and (4)-(6) and Section 203A(1)(c) ICTA 1988

At first sight the crediting rule at SE42310 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 an emolument is credited. An entry in the accounts or records for “remuneration” which is not yet an emolument is not caught. Here are three examples.

1. Draft entries in accounts and records

When draft accounts are prepared the bookkeeper (or the accountant) may enter a figure for the directors' remuneration which is likely to be voted at the Annual General Meeting. But merely writing down a figure does not of itself create an emolument. In the absence of a service agreement which provides the remuneration, an emolument cannot exist until the shareholders agree that one is due. Often, therefore, the emolument will be paid when voted at the Annual General Meeting. But the shareholders can decide that emoluments should be paid, or paid on account, before the AGM (see SE42300.

2. Contingent emoluments

Entitlement to an amount which is contingent (that is, dependent) on a condition being met in the future is an emolument only when 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 2000 provided the director is still in office on 1 November 2001. Payment is to be made on 1 November 2001 if the condition is met. The director gets nothing if he or she leaves at any time before 1 November 2001 because entitlement to the emolument is contingent on further service. It follows that an emolument only comes into existence for Schedule E purposes when the condition is met on 1 November 2001.

When the accounts to 31 December 2000 are finalised in March 2001 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 an emolument.

3. Provisions for emoluments

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