Noddy accountancy question

[martinb]

You will have been trading whilst insolvent. You may not pay dividends out of expected future income, you can only pay from funds that you already have.

So, when this unexpected cost comes in, you should be all square. You then stop paying dividends until you can meet it. The state of not making enough to cover dividends already paid should not occur.

tim

The trouble is, that funds is not equal to profit. Its perfectly feasible to have plenty of cash in the bank (and therefore "funds that you already have") but that doesn't mean you're going to make a profit or that you have any retained earnings from which to pay dividends.

The "state of not making enough to cover dividends already paid" CAN occur if there is an unexpectedly large bill that reduces profits to an amount lower than dividends already drawn.

[tim123]

What happens if you pay dividends, and then late in your company year you have an unexpected cost to meet which means you don't make enough profit to cover the dividends you've already paid? Is it just that the IR are likely to demand income tax on some of the dividends, or is it likely to be more serious than that? I guess for real abuse of the system you can find yourself disqualified as a director.

You will have been trading whilst insolvent. You may not pay dividends out of expected future income, you can only pay from funds that you already have.

So, when this unexpected cost comes in, you should be all square. You then stop paying dividends until you can meet it. The state of not making enough to cover dividends already paid should not occur.

tim

[VectraMan]

What happens if you pay dividends, and then late in your company year you have an unexpected cost to meet which means you don't make enough profit to cover the dividends you've already paid? Is it just that the IR are likely to demand income tax on some of the dividends, or is it likely to be more serious than that? I guess for real abuse of the system you can find yourself disqualified as a director.

[boredsenseless]

A friend of mine took variable monthly divvies which wasn't really a problem. However, he took divvies occasionally when there wasn't technically a profit in the company to justify them. Although nothing has happened thus far and on-going revenue covered it, he worries that he might be in hot water at some point.

I wouldn't advise this at all.

I was lucky in that I'd done many years in a very well paid permie post before. So by just paying a little more than I would do now in PAYE I could ride the year out without dividends.

Dividends now are a lot easier to schedule and pay as they are always out of the previous years profits and therefore the onus of proof that the board new it was profit is taken away.

Obvioulsy this option isn't open to all but if you can manage a year without dividends it certainly makes future planning easier.

[flatfish]

Penalties

A friend of mine took variable monthly divvies which wasn't really a problem. However, he took divvies occasionally when there wasn't technically a profit in the company to justify them. Although nothing has happened thus far and on-going revenue covered it, he worries that he might be in hot water at some point.

[Mustang]

Combination

The key thing, as far as I am aware, is the frequency at which you declare the dividend and not when you draw it. On the books this brings into play Director's accounts.

In view of this, my accountant has advised (for my current situation) to declare the dividend for the coming quarter (minutes of meeting and Tax vouchers can then be produced) and then draw a third of it each month.

HTH

[boredsenseless]

I know the IR like to see quarterly dividends...

I think you might find that they like to see no dividends and it all paid as PAYE!

Obviously there is no legal reason why you can't draw a dividend every day if you so wish.

The rule is however that you need to know it is actual profit. So in your circumstances you really need to do the following.

2000 * 12 = 24000 since you'll want a salary all year
5000 for expenses and other costs.

so after 29000 you can argue that the rest is profit since if you incurred any more expenses it is because you are working and hence putting more cashflow in.

below this figure you actually can't prove that the figure is profit, only that you hope so long as the contract isn't terminated that it will be.

The best way to do dividends is at the end of the year after the corp tax has been paid, that way you know exactly what has been made in profit.

Alternatively declare an interim dividend after 8 months of all the money that is in the account that even if you didn't actually invoice for the next 12 months would still be there, and pay the rest at year end.

Monthly dividends - salaried employee shoudl pay PAYE...

It's not rocket science if you pay divi's on a regular timescale for no reason other than the fact your current account is dry then its a salary you can argue the legality all you want but the proof is there in your current account statements.

If you must take divis monthly make them for different amounts as once again if you can show a monthly pattern of 2000 in divis (for example) it looks like a salary

[oraclesmith]

Tony, if you need the money I think that it is possible for your Company to make a loan to a Director. I have never done it though. I would imagine there are rules surrounding this and you will have to pay it back! Again, see my earlier comment regarding accountancy matters and ask your accountant.

It's £5k absolute max via a Directors Loan account. To avoid tax and NI on the loan you should pay it back before the end of tax year. Also, you must pay it back within 9 months after the end of tax year in order to avoid a hefty 25% charge on it. I have used it on occasion to pay big personal bills but always make sure to pay it back to the company as soon as possible thereafter.

PS. It's normal practise for small businesses to allow up to £5k build up in a DLA and to use the divi's to pay the DLA back (ie. the money that would have gone to the Director in divi's is used to pay back the loan).

[Gonzo]

I always thought that it unwise to take monthly dividends as the Revenue might view this as "salary" and collar you for the NI on it. But I am not an accountant so my views on accountancy matters need to be taken with a large pinch of salt.

Tony, if you need the money I think that it is possible for your Company to make a loan to a Director. I have never done it though. I would imagine there are rules surrounding this and you will have to pay it back! Again, see my earlier comment regarding accountancy matters and ask your accountant.

[VectraMan]

My accountant recommends doing dividends monthly, and to basically work out your profit, subtract 20% to allow for corporation tax (it's actually 19%, but I guess some leway doesn't hurt) and the rest can be distributed as dividends. I've done four in six months, but that was mainly because I wanted to clear my credit cards, once I get into some sort of normality I'll probably go for 3 months.

In theory you shouldn't pay any dividends until you've got enough money in the company to cover all the costs for the rest of your company year. Paying dividends and then not being able to pay VAT or corporation tax is a big no no.

[BoredBloke]

I know the IR like to see quarterly dividends, but do any of you lot draw them more frequently? What I am eventually looking to do is draw a dividend on a monthly basis for say the first 3 to 6 months to build up cash in my personal account to allow me to then start pulling dividends on the more normal quarterly basis.

Also, if your company is getting £1600 per week before VAT, what should I be looking to take home? I’m not really interested in leaving a massive amount in the company. My basic calculations are, using a 12 week quarter to account for holidays are

Gross amount : 1600*12 weeks = 19200
Wages tax and NI:2000 per month*3 = 6000
Expenses 1000 per month = 3000
Other costs : 500 per month = 1500

Taking these costs away from the full turnover leaves me with 8700 available for my dividend. Obviously this would be reduced by the tax due on it.

Am I on the right lines or am I missing something? Would the IR come down on my like a ton of bricks if I took say 2.5k/month as a dividend for the next 3 to 6 months?