Director loan and new dividend tax

[WordIsBond]

Just suppose, theoretically, YourCo has a £50K corporation tax payment due in April next year. You are a responsible director and have had the £50K set aside in an account earning some paltry level of interest.

Is there anything to prevent you doing the following?

1. Pay a dividend of £50K at the end of March.
2. Loan the money back to YourCo to pay the tax.
3. Next year, take dividends and salary up to £43K, and anything you want to take above that is loan repayment (up to £50K).

Does that work, or would it be considered an illegal dividend if it put the company into a negative balance situation? Presumably, the negative balance would be resolved by the end of the company's year.

[ContrataxLtd]

Just suppose, theoretically, YourCo has a £50K corporation tax payment due in April next year. You are a responsible director and have had the £50K set aside in an account earning some paltry level of interest.

Is there anything to prevent you doing the following?

1. Pay a dividend of £50K at the end of March.
2. Loan the money back to YourCo to pay the tax.
3. Next year, take dividends and salary up to £43K, and anything you want to take above that is loan repayment (up to £50K).

Does that work, or would it be considered an illegal dividend if it put the company into a negative balance situation? Presumably, the negative balance would be resolved by the end of the company's year.

Sounds like the dividend would be considered illegal because you don't have sufficient reserves at the time the dividend is declared to cover it,thus your plan would be ineffective.

Martin
Contratax Ltd

[northernladuk]

Just chill... plenty of time for all this to settle. Once it has then all the tricks and possibilities will start appearing.

[Maslins]

Just chill... plenty of time for all this to settle. Once it has then all the tricks and possibilities will start appearing only to be shut down by the chancellor in the Autumn Statement/March 2016 budget.

FTFY

[WordIsBond]

Sounds like the dividend would be considered illegal because you don't have sufficient reserves at the time the dividend is declared to cover it,thus your plan would be ineffective.

Martin
Contratax Ltd

Thanks, Martin. "Ineffective" is a rather polite terminology for illegal, isn't it?

Just chill... plenty of time for all this to settle. Once it has then all the tricks and possibilities will start appearing.

And.... I pay my accountant to figure it all out anyway.

[ContrataxLtd]

Thanks, Martin. "Ineffective" is a rather polite terminology for illegal, isn't it?

I guess it is yes, I'm trying to think of a situation where it would be legal but then reversed at a later date but I'm struggling with that one..........

[WordIsBond]

Well, it is certainly legal to loan money to your company.

Suppose you loaned the money to the company and THEN paid the dividend. The company would always have the funds to pay the taxes that way -- they'd be paying a dividend out of loaned funds, which normally would be bad business practice, but if the person loaning the funds didn't mind....

[ContrataxLtd]

Well, it is certainly legal to loan money to your company.

Suppose you loaned the money to the company and THEN paid the dividend. The company would always have the funds to pay the taxes that way -- they'd be paying a dividend out of loaned funds, which normally would be bad business practice, but if the person loaning the funds didn't mind....

The actual cash position bears no relevance to this to be honest, you could have £1m sat in the bank but if you don't have sufficient reserves (profit on the balance sheet) then the dividend would still be illegal. If you had sufficient profits to pay the £50k dividend then the theory works but if you have the profit you probably don't need to start messing around with the loans.

If the only money you have in the company is set aside to pay the corporation tax then you presumably don't have any reserves in the company (forgetting about work in progress for a moment) so you'd have to somehow create some income to cover the dividend you want to pay.

Martin
Contratax Ltd

[BrilloPad]

Just chill... plenty of time for all this to settle. Once it has then all the tricks and possibilities will start appearing.

Your plan B is to form a scheme for this? How long does QC opinion take?

[WordIsBond]

Thanks again, Martin. I thought by "reserves" you meant "cash reserves".

I'm glad there are people who actually know this stuff.