Real Time Information, a Late FPS, and a Director's Loan
You run payroll for a 22-employee catering company. In the November pay run, the managing director, Tomas, took a £15,000 'bonus' that was recorded in the payroll software but never actually paid through the bank - instead it was credited to his director's loan account. The FPS for November was filed four days late because the software vendor had an outage. In December, Tomas asked you to reduce his reported salary to the national minimum wage level and reclassify the balance as a loan repayment, backdated to April. Two employees are on flexible furlough-style arrangements that ended in September and have had no pay since. The company is three weeks late paying PAYE for November.
1. Analyse the November bonus: what is the correct payroll and reporting treatment, and what are the consequences of the four-day late FPS?
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The bonus was credited to a loan account rather than paid. That does not make it not earnings. For PAYE purposes, remuneration that is applied for the employee's benefit - including by crediting a director's loan account - is generally treated as paid at the time it is placed at the employee's disposal, so PAYE and employee NICs arise on the £15,000 in the period it was credited, and employer NICs likewise. The payroll software entry was therefore directionally right even though no cash moved; the error is in the assumption that 'no payment means no payroll'. The accounting entry is a debit to salary cost and a credit to the director's loan account, which increases what Tomas owes the company.
That loan then has its own consequences: a director's loan of this kind can trigger a benefit-in-kind charge if it exceeds the threshold and interest is not charged at the official rate, and it can trigger a s455 tax charge on the company if it remains outstanding nine months and one day after the year end. Those are separate from the PAYE point and both need to be considered.
On the late FPS: RTI requires the FPS on or before the payment date. Filing four days late for a genuine vendor outage does not remove the obligation. Late filing penalties for RTI are risk-based and escalate with the number of late filings in a tax year, so a single four-day delay may attract no penalty but still counts toward the pattern. More importantly, the reason should be recorded - vendor outage, with evidence - because if penalties are issued, a reasonable-excuse appeal depends on being able to show what happened and when. Do not simply note 'late' in the file.
2. Tomas asks you to reduce his reported salary to NMW level and reclassify the balance as loan repayment, backdated to April. How do you respond, and how do you handle the unpaid PAYE and the two employees with no pay since September?
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Refuse the backdating. Reducing reported salary to NMW and reclassifying the difference as loan repayment would misstate his earnings for the whole year, understate PAYE and NICs already due, and create false records for months already reported on FPS. You cannot amend an FPS retrospectively to change the character of remuneration that has already been paid or credited; RTI corrections are for correcting errors, not for redesigning the arrangement after the fact. If Tomas genuinely wants to restructure his remuneration going forward, that can be done prospectively with proper advice, but it cannot reach back to April.
On the unpaid PAYE: three weeks late is a compliance failure with interest consequences and potential penalties. You should tell Tomas in writing that the liability is due, set out the amount and the deadline, and note that continued non-payment will be reported. Do not net it off against anything or defer it silently.
On the two employees with no pay since September: this needs checking rather than assuming. If they are still employed but receiving no pay, they may be on unpaid leave, or they may have been incorrectly omitted from the payroll. Either way, they should not simply sit in the payroll with no record. Confirm their status in writing, ensure the correct RTI position (a nil payment FPS may be required to keep their records live), and check whether their treatment is consistent with their contracts and with NMW rules - an employee who is actually working but not being paid is a serious problem that goes beyond payroll administration.