Anyone bring forward dividends to the current tax year?

[Hobosapien]

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.

[PerfectStorm]

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.

[Jessica@WhiteFieldTax]

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?

S386 (2b) CA86


Companies Act 2006

And S830 (2)

Companies Act 2006

[WordIsBond]

And 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.

It's pretty straightforward. However you account for work in progress in your annual accounts, you'd best do it the same way again on 5 April, or any investigation won't go too well for you. If you use a different method, it's likely to be viewed as tax evasion, not merely an honest mistake or even aggressive avoidance.

[WordIsBond]

Never heard of accrual accounting before (maybe it has another name).

Also called "accruals basis" or "traditional accounting."

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?

That is my understanding. Technically, you must always know so that you are sure you are not trading whilst insolvent, check the Insolvency Act if you are bored. Practically, few contractors have the kind of expenses that could cause that to be a problem. But yes, you must at least know enough of your profit/loss position to know that the dividends you are issuing are legal dividends.

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.

[john@UKCA]

Even work in progress has to be accounted for as having accrued, even if it hasn't been invoiced yet.

And 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.

[d000hg]

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?

[Maslins]

LTD 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.

Agree with WordIsBond 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.

[WordIsBond]

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

LTD 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.

[d000hg]

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?

Well technically it's not profit or loss until year-end, is it? So as long as at year-end, nothing is out of order, isn't this technically OK?

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?

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.

Exactly my question...

[WordIsBond]

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.

[stek]

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).

What about the payment on account for next year if you draw over the limit the level of which I have forgotten....

[northernladuk]

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?

[d000hg]

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).