The explanation of how the retirement liability accrues provides two new words for Scrabble – or Word Feud, if you prefer. What’s more, they seem to be cheerful moments: the anniversary of transposition and the benefit anniversary.
Retirement liability (ODV)
With effect from 1 April 2017, the pension of a director and major shareholder (DMS) may no longer be administered in-house. The DMS has a choice of three options. He or she may:
- continue on a non-contributory basis under our own management;
- redeem (with a discount of 34.5% in 2017 on the tax value as at 31 December 2015);
- convert into a retirement benefit obligation (RBO).
The ODV is primarily intended for directors and major shareholders who do not have the cash to pay the payroll tax due upon the surrender of their pension. However, directors and major shareholders who, in view of the tax rates, find it advantageous to receive their pension in instalments may, of course, also opt for the ODV. A major advantage of the ODV compared with continuing the pension on a non-contributory basis under the company’s own management is that, before the pension is converted into the ODV, the entitlement is tax-free and written down to its tax value.
The ODV is a liability on the private limited company’s balance sheet. This liability is based on the tax value of the pension entitlement at the time of conversion to the ODV. This liability is no longer valued on an actuarial basis, but accrues interest annually. During the payout phase, the liability is, of course, reduced by the amounts paid out.
Compound interest
The percentage by which the ODV is increased can be found in the Payroll Tax Implementation Regulations. It is derived from what is known as the ‘U-yield’. In 2017, the ODV must be increased by 0,059%. Anyone who thought that interest could simply be added at the end of each financial year is mistaken. The Central Pension Contact Point (CAP) needs a rather lengthy decision to explain the rules governing the accrual of interest.
The CAP distinguishes between three phases:
- delay phase;
- the year in which the ODV is paid out for the first time;
- benefit phase.
During the deferral period, you can choose between accruing interest on the anniversary of the start of the loan or on the balance sheet date. Where interest is accrued on the interest accrual date, a pro rata calculation must be applied.
In the year in which the first payment is made, interest accrues up to the payment date. That date is then the benefit anniversary.
The benefit payment anniversary is then the point at which the interest must be added to the ODV during the benefit payment phase. Naturally, a weighting percentage must also be determined annually at that time.
Payroll tax
The CAP concludes by stating that these rules apply to the wage tax. If a minor calculation error occurs in the interest accrual, does that result in the penalty of a (notional) surrender of the entire ODV? The CAP could well adopt that extreme position.
At the end of the decision, the CAP states that for the corporation tax we really do need to work with a transitional post.
What was the Tax and Customs Administration’s slogan again? ‘We can’t make it any more fun…’ Well, in this case, we can certainly make it easier!