Reply to: Illegal dividends or not !

[Contreras]

So it's illegal but I can't imagine why you'd be bothered.

The OP asked specifically that.

So presumably they can bothered, even if perhaps the answer wasn't quite what they were hoping for.

[Cirrus]

Shrodinger's Cat etc

Is it correct for me to declare £19,000 as dividends today and transfer it today, in the hope that the Dec month payment to my company will refill the balance !

I think all contractors should have done Physics at university (like obviously I did).

Managing a limited company is not like being an employee. You have to understand when you or anyone else can observe the machinations.

I see lots of discussions on this channel about what you can and can't do. The fact is it doesn't matter a jot what you get up to except when somebody looks at what you've done.

As a contractor (unlike a proper company) you have to ask yourself when anyone might want to inspect your actions.

As an example you can give yourself money under any old pretext and then re-work it at the time you do your accounts. In your case if you couldn't cover the dividend then you could declare it as a loan. I think this is what a lot of people do - hand over all the raw data to their accountant who then lovingly rearranges it into a well known phrase or tax return

Maybe if you were investigated by the Revenue they could see through this and charge you extra tax but they are not bothered about the 'illegality'. That is only going to come from bankruptcy or if you have different classes of shareholders who have a grievance about how things are being run.

People are lecturing you on prudence but as a contractor you have a lot of legal/fiscal leeway in giving your self cash of unknown status.

My mate Colin, for many years, just treated his company bank account as his wallet. He'd go on holiday (I've been there with him) and just pay for family lunch with his company credit card. At the end of the company year his accountant would sort it all out and then he would ask the Revenue if he could pay his tax in instalments (he'd have no money put aside to do so).

As far as I am aware nobody got stressed about this practice. Least of all Colin.

So it's illegal but I can't imagine why you'd be bothered.

[ASB]

Thu accounting guidance as to what constitutes retained and distributable runs to many hundreds of pages.

Assets at fair value are included, same for liabilities. In terms of vat and ct which are the major liabilities they dont have to be excluded until such point as the liability exists.

Hypothetically you could argue...

Bill 10k a month for 10 months with a genuine expectation of continuance.

Pay 100k divi. That is (arguably) ok. But seriously imprudent.

Do you have to say the liability has already arisen? I dont believe so. (Certainly there is a contingent liability)

Of course if the next 20k happens not to materialise then youve got a problem.

If one is asking the question "i wonder if this is ok" then it is likely it is imprudent at least. So it is a matter of weighing up the consequences of it going wrong.

If you absolutely have to have it to stop the house being repossed then doing it and hoping might be pragmatic.

If it is just for a new shiny thing waiting would make more sense.

[Contreras]

Well yeah - but they are deemed illegal, only if you are not able to fulfill any payments ! say, your CT is due in March and you are low on balance in March because you paid yourself a huge dividend, then it is illegal. What if you don't have any obligations at that point or 2 months down the line ?

It's not valid to judge simply from the bank balance.

At any point in time, say that:
- all currently outstanding sales invoices have been settled
- all debts that would be due in the coming year (CT, VAT, NICs, accountants fees, your salary, expenses, ...) have been paid out
- then deduct the company's declared share capital.

If the net total is positive then that amount is available for a dividend, if it's negative then your company is insolvent.

A loan is neutral to that position so you can, technically, take a loan leaving the company unable to pay its debts. This avoids declaring an illegal dividend. However if the company subsequently fails to meet it's tax liability then HMRC can effectively call in the loan for itself, you would be personally liable and, ultimately, at risk of personal bankruptcy. Do NOT consider this a course of action without having it explained by an accountant.

[ChimpMaster]

There is no outright ban in a directors loan funding a house deposit, just as those in the industry have already advised, you need to make sure you ave an adequate reserve / war chest.

If you want to fund a house deposit out of the company, then you need to be very clear on short term (up to 12 months) income, expense, and tax liabilities.

Caveat emptor.

Lenders aren't keen on director's loans being used to fund a deposit. In their eyes (and strictly speaking correctly) the funds are a loan and that means there are 2 charges that can exist on the property i.e. the lender might not be able to get all of their money back in the event of a fire sale.

[Jessica@WhiteFieldTax]

to being with director`s loan is complicated and apparently you are not allowed to fund a house deposit with a company director`s loan it seems.
In the long run I will not be allowing my company to fall short of funds, so just wanted to know if in the short run ( not more than 2 months for my company account to replenish itself !) if that is feasible or not.

There is no outright ban in a directors loan funding a house deposit, just as those in the industry have already advised, you need to make sure you ave an adequate reserve / war chest.

If you want to fund a house deposit out of the company, then you need to be very clear on short term (up to 12 months) income, expense, and tax liabilities.

Caveat emptor.

[Jessica@WhiteFieldTax]

I don't think that's what goodwill is, but on the basis that you have to pay CT based on work done but not invoiced for then surely the same would apply for dividends.

Correct - what's described is Work in Progress, not goodwill. It counts towards turnover in the management accounts at fair valuation (for all intents and purposes hours on time sheet not invoiced) so long as there is no expectation of it being unpaid.

[LondonManc]

How would he even know?

(joke!)

Very true in a tongue-in-cheek way. As long as he's paid when due, he doesn't care. Don't pay him and he'll care very much.

[MrMarkyMark]

Salary is different from dividend. A company can pay a salary to its employees without having reserves but it cannot pay a dividend. IANAA

Yeh, I had an inkling that may have been the case, but we were never skint, in any case .

Anyway, she will be good once the months money and expenses, on top, go in.

[ladymuck]

I'm interested in this as it goes, as the other half is in the position that she has started something fairly recently (6 weeks ago) and has an invoice, for a month, outstanding. There is easily enough to pay all obligations tax wise + a few K surplus.

She went without salary from her Co whilst she was working gratis for a start up.

Are you saying, in this situation, Alan, that she could pay the back dated salary prior to actually being paid for the week invoice?

This is theoretical, in that she doesn't operate "close to the line", anyway, far from it but would be good to know a definitive answer.

Salary is different from dividend. A company can pay a salary to its employees without having reserves but it cannot pay a dividend. IANAA

[ChimpMaster]

Does this 20k in your co's bank account include money owed to the VAT man?

He REALLY doesn't like when he doesn't get what's owed.

How would he even know?

(joke!)

[VectraMan]

would goodwill also count as asset?
i.e. if you're part way through a months work but not yet got a time sheet signed, would that work count as an asset?

I don't think that's what goodwill is, but on the basis that you have to pay CT based on work done but not invoiced for then surely the same would apply for dividends.

[Alan @ BroomeAffinity]

For clarity, I suggested what I suggested because its legal. But that doesn't mean it's not stupid, or imprudent.

[Pondlife]

I'm just going to put this here to give the OP something to think over.

Hi I have spent all of my tax & vat money to keep a roof over

[northernladuk]

I think it's been touched on but where is your warchest in all this. Let's assume you get away with what you do. What happens if you get binned in 2, 3 or more months time and don't get a gig for a couple of months? What are you going to live on?

Your risk is going through the roof. IMO you need to strongly consider this because you are looking at a 6 month + risk here, not just the next invoice.