Director loan and new dividend tax

[northernladuk]

Go for it.

[jamesbrown]

Just suppose, theoretically, YourCo has a £50K corporation tax payment due in April next year. You are a responsible director and have had the £50K set aside in an account earning some paltry level of interest.

Is there anything to prevent you doing the following?

1. Pay a dividend of £50K at the end of March.
2. Loan the money back to YourCo to pay the tax.
3. Next year, take dividends and salary up to £43K, and anything you want to take above that is loan repayment (up to £50K).

Does that work, or would it be considered an illegal dividend if it put the company into a negative balance situation? Presumably, the negative balance would be resolved by the end of the company's year.

You also need to bear in mind that, depending on the dividend taken in 2016/17, the real difference in the tax position may be very small indeed (versus 2015/16) once the grossing procedure is removed, even if the scope for paying no tax up to the higher rate limit is eliminated next year. Calculations here:

Dividend Tax rules change 2016

[DaveB]

How about this senario;

FY year end take a dividend to drain account right down to next to nothing.

Then immediately make a director loan to the business to fill the account.

Then repay the loan once the new FY gets going.

This would help empty your account without leaving you dry and maximise things before the new rules come in.

Assuming you leave enough in the company to settle it's liabilities so you dont decalre an illegal divi.

Depends if you were already in the 40% bracket or not. If you wern't then you end up paying 25% on anything over that this year, as opposed to 7% on it next year (after the 5k allowance) if you stay below the threshold.

If you are already over the limit then you need to work out if you would be better off paying 32.5% on a smaller amount next year or 25% on a larger amount this year. Assuming your dividends would have been roughly the same as previous years.

[PurpleGorilla]

How about this senario;

FY year end take a dividend to drain account right down to next to nothing.

Then immediately make a director loan to the business to fill the account.

Then repay the loan once the new FY gets going.

This would help empty your account without leaving you dry and maximise things before the new rules come in.

[WordIsBond]

Thanks again, Martin. I thought by "reserves" you meant "cash reserves".

I'm glad there are people who actually know this stuff.

[BrilloPad]

Just chill... plenty of time for all this to settle. Once it has then all the tricks and possibilities will start appearing.

Your plan B is to form a scheme for this? How long does QC opinion take?

[ContrataxLtd]

Well, it is certainly legal to loan money to your company.

Suppose you loaned the money to the company and THEN paid the dividend. The company would always have the funds to pay the taxes that way -- they'd be paying a dividend out of loaned funds, which normally would be bad business practice, but if the person loaning the funds didn't mind....

The actual cash position bears no relevance to this to be honest, you could have £1m sat in the bank but if you don't have sufficient reserves (profit on the balance sheet) then the dividend would still be illegal. If you had sufficient profits to pay the £50k dividend then the theory works but if you have the profit you probably don't need to start messing around with the loans.

If the only money you have in the company is set aside to pay the corporation tax then you presumably don't have any reserves in the company (forgetting about work in progress for a moment) so you'd have to somehow create some income to cover the dividend you want to pay.

Martin
Contratax Ltd

[WordIsBond]

Well, it is certainly legal to loan money to your company.

Suppose you loaned the money to the company and THEN paid the dividend. The company would always have the funds to pay the taxes that way -- they'd be paying a dividend out of loaned funds, which normally would be bad business practice, but if the person loaning the funds didn't mind....

[ContrataxLtd]

Thanks, Martin. "Ineffective" is a rather polite terminology for illegal, isn't it?

I guess it is yes, I'm trying to think of a situation where it would be legal but then reversed at a later date but I'm struggling with that one..........

[WordIsBond]

Sounds like the dividend would be considered illegal because you don't have sufficient reserves at the time the dividend is declared to cover it,thus your plan would be ineffective.

Martin
Contratax Ltd

Thanks, Martin. "Ineffective" is a rather polite terminology for illegal, isn't it?

Just chill... plenty of time for all this to settle. Once it has then all the tricks and possibilities will start appearing.

And.... I pay my accountant to figure it all out anyway.

[Maslins]

Just chill... plenty of time for all this to settle. Once it has then all the tricks and possibilities will start appearing only to be shut down by the chancellor in the Autumn Statement/March 2016 budget.

FTFY

[northernladuk]

Just chill... plenty of time for all this to settle. Once it has then all the tricks and possibilities will start appearing.

[ContrataxLtd]

Just suppose, theoretically, YourCo has a £50K corporation tax payment due in April next year. You are a responsible director and have had the £50K set aside in an account earning some paltry level of interest.

Is there anything to prevent you doing the following?

1. Pay a dividend of £50K at the end of March.
2. Loan the money back to YourCo to pay the tax.
3. Next year, take dividends and salary up to £43K, and anything you want to take above that is loan repayment (up to £50K).

Does that work, or would it be considered an illegal dividend if it put the company into a negative balance situation? Presumably, the negative balance would be resolved by the end of the company's year.

Sounds like the dividend would be considered illegal because you don't have sufficient reserves at the time the dividend is declared to cover it,thus your plan would be ineffective.

Martin
Contratax Ltd

[WordIsBond]

Just suppose, theoretically, YourCo has a £50K corporation tax payment due in April next year. You are a responsible director and have had the £50K set aside in an account earning some paltry level of interest.

Is there anything to prevent you doing the following?

1. Pay a dividend of £50K at the end of March.
2. Loan the money back to YourCo to pay the tax.
3. Next year, take dividends and salary up to £43K, and anything you want to take above that is loan repayment (up to £50K).

Does that work, or would it be considered an illegal dividend if it put the company into a negative balance situation? Presumably, the negative balance would be resolved by the end of the company's year.