Earnings from employment are taxable, broadly, on a receipts basis1. The assessment and collection of tax on money earnings may be deferred where payment of those earnings is delayed. There could therefore be a discrepancy between the time at which the employer obtains relief in respect of the earnings and the time at which tax is suffered by the employee. The provisions described below are designed to put some limit to this discrepancy.
Where employees' remuneration, including an amount for which provision is made in the accounts with a view to its becoming employees' remuneration, is charged in the accounts of an employer but is not paid before the end of nine months after the end of that period, that remuneration is disallowed as a deduction in computing the assessable profits of that period. Instead, it is allowed as a deduction in computing the assessable profits of the period of account in which they are paid2. The restriction applies whether the amounts charged are in respect of particular employments or in respect of employments generally3. HMRC considers that redundancy payments are within these rules4.
Brett, who has not elected to use the cash basis for small businesses, prepares accounts to 31 December each year. In his accounts for 2018, he makes a £15,000 provision for salaries which were not paid by the end of the year. These salaries are eventually paid on 1 August 2019 (£5,000) and 1 October 2019 (£10,000).
Brett can obtain a