Withdrawing dividend before invoice paid?

[rm55]

Hi all, just after some opinions on the following...

The 0% rate on my personal credit card ends on the 23rd Feb I obviously want to clear it before I get charged interest on the balance.

I currently have enough available funds in my Ltd Co business account to clear it, but technically won't have enough "Profit available for Dividend" on that particular date as my last invoice that was submitted in January won't be paid until the final week of Feb.

My understanding is that it will be OK to declare and pay the dividend now as the profit is based on the invoice date?

[TheCyclingProgrammer]

You either have enough retaind profit or you don't. If you don't, you cannot take a legal dividend (you could potentially take a loan but there are lots of potential implications and if your business finances are as tight as they sound I strongly I recommend you don't).

Are you using cash or accrual based accounting? If it's the latter, then the turnover (and thus any profit) is available from the invoice date. If it's the former, then you won't have the profit until you get paid. If you don't know, then I think you ought to speak to your accountant.

I'm assuming that you're new to this and hence haven't built up any reserve profit in the company to date? If you're living from invoice to invoice, you may want to evaluate how much you are drawing from the company and try and let some reserves build up.

Even if you're accounting on an accrual basis, if you're company's financial situation is tight, there is still a risk of declaring the dividend before you get paid. It wouldn't be illegal, but what happens if you don't get paid and end up with a bad debt? The cash that you would be eating into...will you leave enough to cover your normal company expenses and liabilities? (VAT, salaries, etc.).

Why not balance transfer onto a new 0% card? There must be some cheap deals out there.

[rm55]

Thanks for the reply. I didn't want to bore people by going into too much detail in the first post, but to elaborate slightly, it isn't as bad as it sounds...

There's comparatively little reserve built up in the company but that's mainly as I only went Ltd in mid-September having worked through an umbrella company before that.

I have enough personal savings in an ISA to pay off the credit card easily enough, but if I say take the money out of the ISA now then replace it with a dividend payment next month (when the lack of profits are no longer an issue) I then won't be able to pay any more into the ISA this tax year. However if I clear the credit card without touching the ISA then I'll be able to draw another dividend a couple of months down the line in early April to top up the ISA as I'll still have the 2013/14 allowance available to me.

The timing's just worked out a little awkwardly - if the card 0% rate ran out just a week or so later it'd all be fine!

Would a directors loan of £5000 for a week be a better idea than a dividend?

[TheCyclingProgrammer]

If you have the profit available (you didn't answer my question re: cash vs accrual accounting) and you're not going to leave yourself short when it comes to paying the liabilities then just take the dividend.

If you're on cash accounting and can't take the dividend yet, you could take a loan up to £5k without any other implications as long as you pay it back as soon as you have the profit to declare a dividend. If you do this you should make yourself fully aware of the risks involved in not paying it back (really, talk to your accountant).

Your have several options with various degrees of risk. All the options that involve paying yourself now carry the risk of the invoice not being paid. Only you know how big a risk that is.

Your options are:

* Transfer the credit card balance to a new card and pay it off once the invoice has been paid. Pretty much risk free.
* Pay it off with your ISA money. Risk free but affects your savings plans.
* Take a dividend now, if you have the profit to do so (depends on your accounting basis). Risk is the invoice not getting paid and you not having sufficient cash in the business to meet its liabilities.
* Take a loan of you're unable to pay the dividend now, repay it by declaring a dividend as soon as your paid. Carries the same risk as above, plus the additional risks involved in not being able to pay the loan back. In fairness, you can probably mitigate this risk by paying the loan back using the funds in your ISA if the invoice doesn't get paid.

Why don't you run these options past your accountant? You shouldn't do either of the last two options without speaking to your accountant first.

[Wanderer]

I currently have enough available funds in my Ltd Co business account to clear it, but technically won't have enough "Profit available for Dividend" on that particular date as my last invoice that was submitted in January won't be paid until the final week of Feb.

My understanding is that it will be OK to declare and pay the dividend now as the profit is based on the invoice date?

Yep, go right ahead.

You can declare a dividend out of company profits on the same day you raise an invoice. You don't have to wait for the invoice to be paid provided you have a reasonable expectation that the invoice will actually be paid.

[Jessica@WhiteFieldTax]

Cash v accrual accounting is generally a vat only concept, for companies (cf sole traders on simplified accounting) the accounts for Corporation Tax, Companies House, etc, must be prepared on an accruals basis.

Inter alia, all other things being equal, its fine to treat a invoice raised but not paid as distributable profit and dividend against it.

Caveats around making sure money put aside for tax, all liabilities up to date, debt being good (i.e. not a iffy client who may default).

[TheCyclingProgrammer]

Cash v accrual accounting is generally a vat only concept, for companies (cf sole traders on simplified accounting) the accounts for Corporation Tax, Companies House, etc, must be prepared on an accruals basis.

TIL, thanks!

[VectraMan]

Yep, go right ahead.

You can declare a dividend out of company profits on the same day you raise an invoice. You don't have to wait for the invoice to be paid provided you have a reasonable expectation that the invoice will actually be paid.

You can declare a dividend before that in theory. The company year end and CT calculations include money that you're owed, but should also include the value of work you've done but not invoiced for. So the calculation for shareholders funds would include profits you haven't invoiced for yet. I'm not suggesting that's a good way to operate ;-).

Ultimately, as long as you don't fail to make the CT payment 9 months after the year end, nobody is ever going to care.

[Martin at NixonWilliams]

As pointed out above, it is fine to declare and pay the dividend prior to the invoice being paid. However, if there is any doubt over the invoice being paid I would avoid doing this where possible.

[barrydidit]

So this isn't directly the question OP asked but....unless my figures are totally busted, even a 30% interest rate on £5k would be only about £28 a week. Assuming that your debt is less than £5k and the interest rate is in the 10-20% area, is it worth the agro for the sake of a week or so?

I'd just declare a dividend once the invoice was paid and then clear the card balance.