Keeping sufficient capital to pay CT

[Hobosapien]

With the move to Making Tax Digital and quarterly reporting there will be less scope to mismanage the accounts and get away with it.

Use some decent accounting software that is MTD compatible and it should assist in ensuring any payments on account, such as divis taken before officially declared on year end accounts, are managed so the associated tax bill is catered for.

If the contractor is still so inept they go insolvent then they aren't cut out to be a contractor. HMRC will be doing them a favour them to buck their ideas up.

[northernladuk]

It's a dangerous way to run a business (leaving no buffer when the dividend was taken). Also there's a risk HMRC could successfully argue that the director was negligent in continuing to incur costs after income had ceased, especially if the main cost was their salary.

This ^^ We've seen plenty of threads on here where people have paid everything out with no tax money left and have been in dire straits. Nothing we can do to help them and in most cases they didn't get one iota of sympathy for their situation either.

I can't imagine how much time accountants waste trying to get people out of holes like these either.

There is also the flip side where people do have regular income so they think they can divi the lot and the last few months of the year will top up the missing tax. Seen a contractor in tears living this lifestyle and get's given his notice mid contract.

[Maslins]

If hypothetical situation is (simplifying CT rate to 20% for ease of numbers):
- company makes £10k profit in first 6 months.
- £2k should be set aside for CT liability.
- shareholder takes £8k dividend.
- this leaves retained profit as £nil, cash balance as £2k.
- work then dries up.
- second 6 months a loss is made (based on expenses/salary) of £2k.
- company now has no cash.

Dividends were legal when they were paid.

It's a dangerous way to run a business (leaving no buffer when the dividend was taken). Also there's a risk HMRC could successfully argue that the director was negligent in continuing to incur costs after income had ceased, especially if the main cost was their salary.

[Lance]

My understanding is that dividends may only be paid from retained profits, and any dividend paid must not occur at the expense of the company's CT liability, thus rendering the dividend ultra vires (illegal). The implication here is that, if a company begins trading in May, stops briefly, its cash balance must not then fall below whatever CT it owed at the time the most recent Dividend was paid. However I read that salary can continue to be paid even if this depletes the funds available to pay CT - I have to ask if the same is true of expenses.

What exactly does the law say about funds availble to pay CT?

IANAL - but ican be illegal to trade if insolvent. Insolvency is where the sum of company money owed out is greater than the sum of assets + money owned in. Sounds like yor scenario if you can't pay the CT bill.

Obviously it's best for all parties, inclduing HMRC, if you can trade back into profit.
So you can trade still but with some warnings and exceptions.
Read this.
Trading Whilst Insolvent Worried Directors Guide - Company Rescue

[Tentelow Man]

My understanding is that dividends may only be paid from retained profits, and any dividend paid must not occur at the expense of the company's CT liability, thus rendering the dividend ultra vires (illegal). The implication here is that, if a company begins trading in May, stops briefly, its cash balance must not then fall below whatever CT it owed at the time the most recent Dividend was paid. However I read that salary can continue to be paid even if this depletes the funds available to pay CT - I have to ask if the same is true of expenses.

What exactly does the law say about funds availble to pay CT?

Thanks,

TM