Question about taking money out of a business

**VectraMan** · 6 March 2013, 08:47

If you don't have the money to cover your costs, i.e. salaries, CT and anything else, then effectively you're already bankrupt.

However, you only pay CT on profit, so how are you in profit if you don't have enough money to cover your costs?

Sounds like you've made the mistake of paying too large interim dividends without thinking about the the rest of the year. It's the whole year that counts, and if at the end of it you don't have the money to pay your tax because you've paid dividends, that's where you get into trouble.

**Jessica@WhiteFieldTax** · 6 March 2013, 08:57

This is an area where a PSC differs from other companies - as there are generally insubstantial other assets on the balance sheet, cash broadly equals profit, and tax needs to be provided as you go and kept to one side - I.e. not borrowed against.

If you do borrow against it the then it implies that dividends have been taken out in excess of profits.

So to answer your question, don't do it. Whether you are drawing salary, dividend or profit, keep the tax reserve untouched.

**Scrag Meister** · 6 March 2013, 09:02

Originally posted by Jessica@WhiteFieldTax View Post

So to answer your question, don't do it. Whether you are drawing salary, dividend or profit, keep the tax reserve untouched.

WJS

Accrue your CT, VAT ready for when you need it. Separate accounts so you know whose money is whose.

Applies to personal tax on your side too.

**Wanderer** · 6 March 2013, 09:12

Originally posted by TheMrs View Post

However can you still take salaries and pay other bills even though the business would be effectively eating into the "set aside" corporate tax? Obiously every time you pay a salary or make another allowable purchase you are effectively lowering your overall tax bill anyway, but I wanted to be sure whether I can eat into the set aside CT throughout the year if necessary, or whether businesses need to have that money locked away on a real time basis.

Yes, in my opinion it's perfectly reasonable to can continue to pay salary if you are reasonably sure that the company will continue to trade as a viable business.

I'm concerned about what you mean by "pay other bills" though. If you mean company bills then yes you can as long as the company is still viable. If you mean using the company's money to pay personal bills then I don't recommend that you do that because your company will need that money back eventually and there will be a lot of trouble (including a 25% charge) if you can't repay it at exactly the right time. Do a google for site:contractoruk.com directors loan and talk to your accountant about the implications though they will probably tell you not to take directors loans at all.

Originally posted by VectraMan View Post

If you don't have the money to cover your costs, i.e. salaries, CT and anything else, then effectively you're already bankrupt.

Lots of people run small businesses which have short term cash flow problems, it doesn't mean that they are "bankrupt" because they continue to trade as a viable business and repay their debts. I agree that a one man consultancy business with few expenses other than salary, accountant's fees and travel/subsistence shouldn't end up in that state though.

**northernladuk** · 6 March 2013, 11:53

Originally posted by Wanderer View Post

Lots of people run small businesses which have short term cash flow problems, it doesn't mean that they are "bankrupt" because they continue to trade as a viable business and repay their debts. I agree that a one man consultancy business with few expenses other than salary, accountant's fees and travel/subsistence shouldn't end up in that state though.

This is true but I bet there are a lot of companies that thought this would rectify itself and dipped in to what wasn't theirs and never made it back. It might be possible but it is not somewhere you want to be going without thinking very carefully. Only takes one contract to get finished and some times on the bench and the OP is seriously fked.

**TheMrs** · 6 March 2013, 15:49

[QUOTE=Wanderer;1709330]

I'm concerned about what you mean by "pay other bills" though. If you mean company bills then yes you can as long as the company is still viable. If you mean using the company's money to pay personal bills then I don't recommend that you do that because your company will need that money back eventually and there will be a lot of trouble (including a 25% charge) if you can't repay it at exactly the right time. Do a google for site:contractoruk.com directors loan and talk to your accountant about the implications though they will probably tell you not to take directors loans at all.

Thanks for your reply. Just in answer to the wee point above, I meant pay other company bills like insurance and accountant fees, the usual smallish stuff. There is no question of the company not having enough money to honour comittments come year end, just whether we could use some of the notional tax set aside during leaner times.

Seem the overall consensus is not to do it although interestingly our accountant seemed fairly relaxed about it in principle as long as it all balances at year end. To be safe though I've just moved the whole lot of CT currently notionally due into the same business savings account we use for VAT set aside and won't touch it in future.

We have however run into it a few times in the past few months to the tune of a few hundred quid for a few days at a time in anticipation of a chunky deposit by the client. The dates clients pay don't always match the dates your domestic arrangements require to be paid for. It's been a very steep learning curve and one which I think our accountant could have better prepared us for.

I understand the reasoning behind OP questions that if you have low outgoings and high income, how come you are dipping into CT to pay salaries etc? However the way it's happened to us is that at any point in time we look at accounts and think - right, we've got say £10k in the bank and as at today's date we're owe £5k CT. So we've got £5k profit we can withdraw at this moment in time. However the following week your insurance needs paying for £100 so it comes off the notional CT sitting in the bank and stays that way for a few days till client pays. Etc etc.

As for us, we are now firmly in the black and don't intend any other situation to occur but will of course worry myself sick for evermore thinking Hector is going to come down on us for our early ignorant tansgressions. Speaking of which, does anyone know what they'd actually do to us for eating into CT by a few hundred pounds for a maximum of 4 weeks out of the year?

**northernladuk** · 6 March 2013, 16:34

Where is your warchest?

**tractor** · 6 March 2013, 19:42

...

Insolvent <> Bankrupt!

It is usually illegal to trade whilst insolvent unless of course you are the only creditor. The figures on the balance sheet are the answer to the OPs question.

HTH

**TheMrs** · 6 March 2013, 20:33

Warchest

Originally posted by northernladuk View Post

Where is your warchest?

Being built up on the company's business bank account over the course of this year. Well insured against accident/sickness so only need to legislate for lost income due to lack of a contract and tbh that's highly unlikely given our market and skills shortage atm however are getting quite a few thousand together to leave in business from year to year just incase of leaner times.

Question about taking money out of a business