I've always used the cash accounting method where invoices only appear on the accounts when paid instead of as debtors until paid.
This allows me to know current profit up front (without having to take into account potential bad debtors) and take divis as I need them, usually with the accountant declaring the overall divi when doing year end based on what I've taken during the year.
So in theory I could take divis for profits received so far during the year and if circumstances changed for the worse (long term out of a contract or winding down company) could run out of cash in the company to pay any corp tax before it was due 9 months after the year end.
In practice this seems correct as I had a year or so off contracting a few years into it and wound down the Ltd then re-opened another when going back into contracting later (didn't know at the time I would go back so closed Ltd as it was redundant following unsuccessful attempt to try something else to earn income).
During the winding down over several months but before 9 when corp tax became due it ran out of cash from paying my salary, expenses, and operating costs. During closure (following the rules at the time, which have changed regarding liquidation) the crop tax bill was quashed as far as there was no objection closing the ltd and no follow up from HMRC wanting the corp tax.
Main thing is I was operating the company with intention to stick to the rules and it became a failed business rather than doing this as a way to avoid the tax which if investigated the director(s) become liable for debts if found to be operating incorrectly.
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Previously on "Anyone bring forward dividends to the current tax year?"
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It's only worth doing if you KNOW you'll go into the higher rate next year. Otherwise you're taking on 25% tax now for the sake of it.
Assuming you've taken up to the higher rate by now.
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Originally posted by d000hg View PostNever heard of accrual accounting before (maybe it has another name).
So it's a solid legal argument that a company should/must know its profit/loss position at any time? Or that it must when issuing dividends specifically?
Companies Act 2006
And S830 (2)
Companies Act 2006
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Originally posted by UK Contractor Accountant View PostAnd therin lies the problem- how many Contractor Ltd's will be tempted to overstate accrued income in order to bolster the max dividend payable this tax year.
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Originally posted by d000hg View PostNever heard of accrual accounting before (maybe it has another name).
Originally posted by d000hg View PostSo it's a solid legal argument that a company should/must know its profit/loss position at any time? Or that it must when issuing dividends specifically?
For a typical contractor / one man band, it's not usually that important. You can estimate pretty close, deduct a couple thousand to make sure you are within the limit, and take the rest in dividend. If you don't take as much as you could have, well, it's your company and you are in control, you'll get the money out later, at the end of the year or whenever you get around to figuring it out (or maybe your software tells you). There's no rush. This year, there's benefit to getting it exact so you can take out every pound you legally can before the tax hits.
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Originally posted by WordIsBond View PostEven work in progress has to be accounted for as having accrued, even if it hasn't been invoiced yet.
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Never heard of accrual accounting before (maybe it has another name).
So it's a solid legal argument that a company should/must know its profit/loss position at any time? Or that it must when issuing dividends specifically?
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Originally posted by WordIsBond View PostLTD companies use accrual accounting. How could you argue that profit has accrued but the corporation tax on it hasn't? Even work in progress has to be accounted for as having accrued, even if it hasn't been invoiced yet.
I'm no accountant, but good luck finding a competent one that agrees with your idea here.
It's your responsibility to ensure that the company's in a position to legally declare a dividend before it does so.
If it's got cash, but all that cash needs to be set aside for corporation tax (and/or VAT) based on profits earned to date, then that doesn't make it eligible to declare a dividend.
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Originally posted by d000hg View PostI mean generically paying dividends using money sitting in the company account. We talk about setting aside 20% as "HMRC's money" but it's not, it's yourCo's money until HMRC demand it so if you are able to pay all your salary bills, HMRC, etc, without ever going insolvent, isn't this legit? e.g. that £10k you have set aside for CT in June is profit at the moment
I'm no accountant, but good luck finding a competent one that agrees with your idea here.
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Originally posted by northernladuk View PostBut that would mean that you would be Divi'ing money that is not profit? Or is there some fancy accounting black magic to get round this? You mean on the invoice declared even though the money has not been collected yet?
I mean generically paying dividends using money sitting in the company account. We talk about setting aside 20% as "HMRC's money" but it's not, it's yourCo's money until HMRC demand it so if you are able to pay all your salary bills, HMRC, etc, without ever going insolvent, isn't this legit? e.g. that £10k you have set aside for CT in June is profit at the moment
Effectively you would be issuing a dividend 'on account' but as I stress, if you are able to pay your taxes and don't go into debt, is it illegal?
Originally posted by WordIsBond View PostYou mean paying illegal dividends? No (though the likelihood of having trouble on it is low).
Do you mean paying the max dividend I legally can this year? Yes.Last edited by d000hg; 21 March 2016, 16:53.
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You mean paying illegal dividends? No (though the likelihood of having trouble on it is low).
Do you mean paying the max dividend I legally can this year? Yes.
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Originally posted by d000hg View Posti.e. taking as dividends money in yourCo's account to the point you do not have enough for tax liabilities, on the basis that you'll have earned enough to cover it by the time the tax is due?
Clearly, the reason being to avoid the dividend tax at the cost of a slight risk (if you get canned in April for instance).
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But that would mean that you would be Divi'ing money that is not profit? Or is there some fancy accounting black magic to get round this? You mean on the invoice declared even though the money has not been collected yet?Last edited by northernladuk; 21 March 2016, 14:54.
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Anyone bring forward dividends to the current tax year?
i.e. taking as dividends money in yourCo's account to the point you do not have enough for tax liabilities, on the basis that you'll have earned enough to cover it by the time the tax is due?
Clearly, the reason being to avoid the dividend tax at the cost of a slight risk (if you get canned in April for instance).Tags: None
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