Do I legally have to leave the Tax and VAT in the limited company?

[JackD]

Dividends not taken from distributable profits/reserves are so-called ultra vires or illegal, so not a good idea.

So, using the capital that would be reserved for taxes in the short term is illegal? I can only withdraw profits as they stand without accounting for future forecasting?

[JackD]

Heed the warnings. I've seen a grown man literally crying when we all got canned at short notice at a large client. He was the one with the nice car, expensive mountain bike on the roof, took a day off to go queue for the latest apple products etc and bam., the income that was going to pay his VAT and CT bill suddenly disappeared. It happens. Unless it's life or death don't do it IMO

I’d like to pay off a debt that’s higher than normal interest rate, after that I plan to take a modest amount monthly and build a pot in the company

[jamesbrown]

So, using the capital that would be reserved for taxes in the short term is illegal? I can only withdraw profits as they stand without accounting for future forecasting?

Correct, what matters is the position at the time you issue the dividend, not some hypothetical position later on.

[jamesbrown]

In that situation, were HMRC to investigate, they would also be ruthless in reclassifying them as salary payments and pursuing you for the tax owed, quite apart from any solvency issues.

[JackD]

In that situation, were HMRC to investigate, they would also be ruthless in reclassifying them as salary payments and pursuing you for the tax owed, quite apart from any solvency issues.

Is there anything wrong with making it a salary payment? A signing bonus or 10months pay upfront (1k/month)

[jamesbrown]

Is there anything wrong with making it a salary payment? A signing bonus or 10months pay upfront (1k/month)

A company is insolvent when it cannot pay its debts. As a director, you have a responsibility to ensure that your company is solvent. When it is apparent that you are trading insolvently, you have further responsibilities, like preventing further losses to creditors and not making preference payments (i.e., payments to yourself), for example. It sounds like you haven't really read about the very basics of running a company. Perhaps you shouldn't be running a company.

[northernladuk]

I’d like to pay off a debt that’s higher than normal interest rate, after that I plan to take a modest amount monthly and build a pot in the company

That's not enough justification to be doing this with your company IMO. The fallout from this going wrong will be far worse than paying a bit more interest and doing it properly. But that's just me.

If you are thinking of these wheeze I'd guess you'll be tempted by others. Don't. Start off right and continue on that way.

[JackD]

A company is insolvent when it cannot pay its debts. As a director, you have a responsibility to ensure that your company is solvent. When it is apparent that you are trading insolvently, you have further responsibilities, like preventing further losses to creditors and not making preference payments (i.e., payments to yourself), for example. It sounds like you haven't really read about the very basics of running a company. Perhaps you shouldn't be running a company.

Thanks, sounds like the idea is a non starter.

The company would be insolvent when it cannot pay its debts, but the tax wouldn’t be due for 12-18months time, it seems a waste to have the money sat there earning nothing, when it could be being put to better use. I assumed it wouldn’t be illegal, as companies are always creative with their cash flow.

A debt isn’t due, until it’s due is it?

[northernladuk]

A debt isn’t due, until it’s due is it?

You aren't getting the message are you.

[JackD]

You aren't getting the message are you.

I fully understand it isn’t advisable and it’s best not to do. I’m unclear if it’s illegal. I will not do it illegally. I agree that it’s best to avoid doing so, but there’s always going to be niche scenarios that the rule of thumb doesn’t account for.

I was only asking for clarity on if it’s illegal and why. If I paid my self my yearly salary (10-12k) in the first month as a signing incentive, then only took dividends when the company is profitable, why is that illegal? A lot of companies provide signing bonuses, infact, I’m sure there’s alot of tech startups, losing money, who are also paying sign on bonuses.