Carryforward loss as a tax wheeze?

[Olly]

So if I understand things, salary and pension are allowable costs of doing business.
If hypothetically your Ltd built up chunk - £500k let's say of retained profit but then contracts dried up so there was no income for a few years but you continue to pay the sole employee/director £12k and maybe some salary sacrifice pension contributions too.
Then would those years legitimately count as a loss than can be offset against profit if you find a contract in a few years time?
Strikes me that could be an effective strategy when "retired" and only wanting to do very very choice contracts with big gaps in between.

On related but different note....taking dividends from your loss making company up your 40% bracket at 8% tax would appear to offer a tax saving (increasing year on year) vs the equivalent MVL rate. Right? Ah maybe you can't take a dividend unless there is a profit?

[northernladuk]

Been asked a few times on here. Couple of the threads were largely inconclusive but this one actually has two accountants commenting on it and it appears OK with some caveats.

https://forums.contractoruk.com/acco...this-year.html

This one also mentions it can be done.

https://forums.contractoruk.com/acco...-an-issue.html

and another with a good post from WordIsBond

https://forums.contractoruk.com/acco...-the-year.html

In more than one of the threads it does mention MVL'ing is a better option tax wise depending on your circumstances but it never mentions the fact you can't open a LTD for two years so take that in to account.

[WTFH]

On related but different note....taking dividends from your loss making company up your 40% bracket at 8% tax would appear to offer a tax saving (increasing year on year) vs the equivalent MVL rate. Right?

I could be wrong on this one, but dividends are paid from profits, not from capital.

[jamesbrown]

Dividends are paid from accrued profits - it doesn't matter whether these profits were accrued in the present tax year - and, yes, the dividend tax rate is currently lower than the BADR rate for capital distributions. The basic dividend tax rate is 8.75%, not 8% and, obviously, that is after CT.

Regarding carrying back losses, potentially, yes, but this isn't really a wheeze and you cannot continue to carry back losses indefinitely, so it isn't a long-term approach either.

These are questions for your accountant, obviously.

[Olly]

Dividends are paid from accrued profits - it doesn't matter whether these profits were accrued in the present tax year - and, yes, the dividend tax rate is currently lower than the BADR rate for capital distributions. The basic dividend tax rate is 8.75%, not 8% and, obviously, that is after CT.

Regarding carrying back losses, potentially, yes, but this isn't really a wheeze and you cannot continue to carry back losses indefinitely, so it isn't a long-term approach either.

These are questions for your accountant, obviously.

Great thanks - thanks that's good then. Seems sensible to slowly drain the Ltd via dividends, pension and salary then especially when BADR tax rate goes up.
When I wrote the post I didn't know there was such a thing as carry back, the qu was about carry forward. Hearing about carry back is quite a nice little boost. 60K+12K @ 25% CT = £18K, tidy!
I know everyone feels compelled to add the "ask your accountant" tag line but I'm not going ot pay for hypothetical advice, I only started contracting again today.
Also, reading the links from NLUK is sounds like some accountants don't agree on this or are downright wrong

[northernladuk]

Great thanks - thanks that's good then. Seems sensible to slowly drain the Ltd via dividends, pension and salary then especially when BADR tax rate goes up.
When I wrote the post I didn't know there was such a thing as carry back, the qu was about carry forward. Hearing about carry back is quite a nice little boost. 60K+12K @ 25% CT = £18K, tidy!
I know everyone feels compelled to add the "ask your accountant" tag line but I'm not going ot pay for hypothetical advice, I only started contracting again today.
Also, reading the links from NLUK is sounds like some accountants don't agree on this or are downright wrong

I think the call out that the accountant one of the posters had was outright wrong. At least two respected accounts that posted on here said it was OK with caveats. I'd be speaking to a contractor specific one that's probably been asked this a thousand times.

I do think there might be an issue with carry back when not trading though so need checking. I could be totally wrong here but I thought I saw a comment about using the full carry back when you aren't trading causes some issues. Ask about that one in detail when you do speak to an accountant.

[css_jay99]

Great thanks - thanks that's good then. Seems sensible to slowly drain the Ltd via dividends, pension and salary then especially when BADR tax rate goes up.
When I wrote the post I didn't know there was such a thing as carry back, the qu was about carry forward. Hearing about carry back is quite a nice little boost. 60K+12K @ 25% CT = £18K, tidy!
I know everyone feels compelled to add the "ask your accountant" tag line but I'm not going ot pay for hypothetical advice, I only started contracting again today.
Also, reading the links from NLUK is sounds like some accountants don't agree on this or are downright wrong

Unless I am mistaken, you can only carry back losses if they are related to trading, as far as the HMRC software is concerned salary is not part of it.

Also paying salary & pension out of retained earnings is effectively double taxation. You have already paid CT on retained earnings so better coming out of current year revenues pre tax