In these difficult times, most businesses are working to preserve their cashflow, and many will be looking at how to reduce the wage bill.
Although you can furlough staff and claim through the Coronavirus Job Retention Scheme, that may not be available in all circumstances and, even where it is, it may still be necessary for staff to take a pay cut. In many cases, directors and senior staff are opting to reduce their pay and/or waiving bonuses to help protect jobs in the business.
It will be easier to achieve such arrangements if employees know that they will get an enhanced salary package when the business recovers. For example, you may choose to create or enhance a share option scheme for senior staff or create a new performance-related bonus scheme for all employees.
There are many alternatives available, but it is important to take advice on the best way to structure such incentives to meet your business needs – it need not be a complex scheme or an open-ended commitment. For example, if you do not want to dilute your ownership of the business, then a ‘phantom’ share plan (based on share values but only paid in cash), or a straightforward cash bonus scheme may be appropriate.
If you are prepared to offer shares, there are a number of ‘tax-advantaged’ share plans that you could create that offer tax savings to both employees and employers. For example, for options issued under the Enterprise Management Incentive (EMI) scheme, the company can claim corporation tax relief on the difference between the market value of the shares at exercise and the option price paid.
Getting the timing right is crucial. The strict tax position is that tax is due on the remuneration to which employees are contractually entitled when they are deemed to receive it. For most employees, this occurs at the earliest of the date:
- The earnings payment is made
- The employee becomes entitled to the earnings payment
For directors there are further dates to consider, again the liability arises at the earliest of:
- The date that sums on account of the earnings are credited in the company’s accounts or records
- The date the director is able to actually draw any funds
- The last day of the company accounting period if the earnings for that period have been determined by then
- The date when the amount of earnings for an accounting period is determined, if that happens after the end of the period.
In theory, HMRC can seek the tax and NIC due from the individual and business on the basis of their entitlement – regardless of whether or not it was paid. Therefore, it is vital to have proof that any waiver was agreed with the employee/director as evidence that their contractual entitlement was varied before the individual became entitled to it.
It is import to maintain an audit trail of evidence for HMRC – for example a letter and acknowledgment or an email trail should be sufficient. For directors, it is sensible for a board minute should be made for amendments to director’s remuneration.
Of course, many other situations and circumstances can apply in these difficult times, so for help and advice on managing your employee wages and incentives, please get in touch with your usual BDO contact.
Employer Essentials index