How much you can actually take as invoices

[d000hg]

Looking at my company account, I have £X, of which most is gross profit and some is going to be needed for business tax.

My question is if I have to work out exactly how much of that £X can be counted as profit at the end of this month? Or am I allowed to take as much out as I want, as long as I always pay my tax bills? i.e can I drain my account and use profit from next tax year to pay this year's tax, (taking the gamble that I'll make profit next year of course)? Are HMRC going to check this or are they happy as long as they get their money?

[Little'Old Me]

Looking at my company account, I have £X, of which most is gross profit and some is going to be needed for business tax.

My question is if I have to work out exactly how much of that £X can be counted as profit at the end of this month? Or am I allowed to take as much out as I want, as long as I always pay my tax bills? i.e can I drain my account and use profit from next tax year to pay this year's tax, (taking the gamble that I'll make profit next year of course)? Are HMRC going to check this or are they happy as long as they get their money?

I wouldn't advise it! If you take all the money in the company account you could make the company insolvent..... or end up paying extra tax on a loan (if no dividends ect..are given) .... have to submit P11ds for the BIK for the interest on the loan ........

This is why we do management accounts (which clients hate paying for) - so you can have a "board meeting" and award yourself legal dividends and know you are taking money legally!

[frank size]

depends if you are taking as a divi or salary. You can take as much salary as you like but only a divi up to retained profits - thats after corp tax and othr expenses but you can add in last years retained profits.

[d000hg]

depends if you are taking as a divi or salary. You can take as much salary as you like but only a divi up to retained profits - thats after corp tax and othr expenses but you can add in last years retained profits.

Yeah it's dividends I'm talking about. Obviously it's year-end soon and my curiosity is that since you don't pay corp tax for ages after year-end, you have loads of time to make sure your account has enough to pay that tax even if you drained the account for a dividend (leaving enough for short-term expenses). You're not changing at all how much you end up taking as dividends or how much tax you pay, you're just kind of taking some of the dividend a bit early

So what you're saying is I have to properly calculate how much of my account balance is profit?
It seems to me the amount I need to leave in the account for tax should be approximately:
TAX = (BALANCE - BILLS_OUTSTANDING + DIVIDENDS_TAKEN) * 20%

Or is that too simple? Yes I will be checking with my accountant but it's interesting to discuss here I think.

[Gonzo]

Yeah it's dividends I'm talking about. Obviously it's year-end soon and my curiosity is that since you don't pay corp tax for ages after year-end, you have loads of time to make sure your account has enough to pay that tax even if you drained the account for a dividend (leaving enough for short-term expenses). You're not changing at all how much you end up taking as dividends or how much tax you pay, you're just kind of taking some of the dividend a bit early

I am not an Accountant, but I think that what you are suggesting would be to declare a dividend illegally.

I don't know how bad the tulip you could end up in for doing that would be, but your accountant should be able to tell you.

The illegal dividend may never come to light and you could be OK. If for some reason you don't have the money to pay the Corporation Tax when it is due then it will be "skip the country never to return time" for you.

[xoggoth]

Not actually done it but not sure there is anything illegal in your idea. CT is on profit before dividend so you are not reducing the payment in any way. Probably needs a proper accountant's opinion.

It cannot be true that a company is insolvent simply because it does not have enough ready money in the bank to cover expected bills or no company would ever get off the ground. Many make a loss to begin with and owners often have to put their own money in to pay the bills. If it has a source willing to pay the bills, ie you, it isn't insolvent IMHO.

[deckster]

So what you're saying is I have to properly calculate how much of my account balance is profit?
It seems to me the amount I need to leave in the account for tax should be approximately:
TAX = (BALANCE - BILLS_OUTSTANDING + DIVIDENDS_TAKEN) * 20%

Whilst that's not too far off, you're thinking about it the wrong way. A better equation is

PROFIT = (INCOME - EXPENDITURE) * 79%

You can then take dividends up to your profit and don't need worry about anything else, although of course don't forget that EXPENDITURE must include salary, PAYE & NI as well as other expenses.

Taking dividends for profit you haven't made is a big no-no and could potentially land you in trouble.

[deckster]

I don't think it's true that a company is insolvent simply because it does not have enough money in the bank to meet expected bills. If that was true no company would ever get off the ground because most make a loss and have to be funded by the owners or loans to start with. If it has a source willing to pay the bills, ie you, it isn't insolvent.

Whilst that's true, a dividend by definition is a distribution of profits. There is nothing wrong with a business making a loss due to outgoings being greater than income, but it is a specific offence to distribute profits that don't exist.

[Alan @ BroomeAffinity]

Not actually done it but not sure there is anything illegal in your idea. CT is on profit before dividend so you are not reducing the payment in any way.

It cannot be true that a company is insolvent simply because it does not have enough ready money in the bank to cover expected bills or no company would ever get off the ground. Many make a loss to begin with and owners often have to put their own money in to pay the bills. If it has a source willing to pay the bills, ie you, it isn't insolvent.

A company is insolvent if "It is unable to meet its debts as and when they fall due" so technically the funds need only be there when the tax is due. However, as an earlier poster said, you shouldn't declare a dividend unless there is sufficient (post-tax) profit from which to pay it.

Have you considered if it is tax efficient to take as much funds out as possible anyway? Will it take you over the higher rate threshold for example?

[Jubber]

How about this scenario.

Let's say there is 20k in the company put aside for Corporation Tax due in October and no other funds. This money is used between now and October to pay salary and expenses (legit) between now and October. The worst possible thing happens and no more work is found for the company.

Come October the 20k has been spent on legitimate salary and expenses only (no divis) but the 20k CT bill is now due and there are no funds to pay it.

The company is now insolvent. Could the director of the company be held as negligent?