Reply to: Corp Tax and Dividends

Re: well it's your choice, mailman

I'm trying (unsuccessfully) to follow this discussion.

How exactly does one leave money in a company and build it up?

My company had some retained profits on which tax has already been paid. Previously this was a good thing since I could use this money for development and hopefully make profits on it in the future. But this retaining money in the company, far from being encouraged is now being penalized.

For example:

1. You have already paid around 20% corporation tax and 17.5% VAT. If you take the profits as dividends and spend the money then there is no more tax to pay.

2. If you have paid around 20% corporation tax and 17.5% VAT and left the money in the company to try and develop future profits. You successully do this and make, say 10% profits on the money left in. Then when you pay all the profits out as dividends and you are hit by another 19% tax. This wipes out all the advantage you had from building up your company and more.

And this is portrayed as somehow encouraging businesses to leave money in? Either I am being totally lied to or I've misunderstood this in some way.

Isn't this a major disincentive for companies to grow?

If someone wants to retain money in the business, but might be caught by IR35, then they would pay 40% income tax, 13% National Insurance, 17.5% VAT, 19% dividends tax (+ more if their expenses exceeded 5% of earnings). This sounds like a lot!

Can you explain this a bit more, or provide some links to some official sources for this? I am confused!

Also, is there some practical way around this. For example, can I take the money out as dividends and then immediately loan it back to the company so that I can build up the company without being hit by the extra taxes. Would my accountant have to declare this as a tax avoidance scheme under the new rules?

Hugebrain

well it's your choice, mailman

You take the money out as dividends, your company pays the 19% tax on it. You leave the money in the company, and use it to employ somebody else, or to buy some whizzy new gadgets that help your business grow, or just to sit in a bank account until next year (to tide you over when you don't have a contract). Whatever you decide, it's your choice.

And of course if you do leave it in the company as cash, and the company doesn't make any profit next year, then it doesn't have any corporation tax to adjust - so you don't actually pay any tax when your company pays it to you as dividend. There will of course be a bit of extra tax to pay the next time your company does make a profit - because it's just deferred. So if you have a long period without work next year - better to pay out your dividends and close the company. Then open a new company later if you need one.

Re: genuine

Surely leaving the money in the business bank account is not a very good indicator of whether you are a REAL business or not?

Mailman

Re: genuine

And who determines what a "genuine" small company is? You...the IR?

To answer your question. You decide. You either take the money out and pay tax on it, or leave it in until you either think of something better to do with it; the tax regime changes; or you have a lean year.

genuine

Wow, Mailman, you've really got a beef about something haven't you?

It's got nothing to do with who decides if you are a genuine business. It's simply to do with what TYPE of business the 0% corp tax band was originally designed to help.

Fact: 80% of small businesses fail in the first 5 years of their existence. It is these small businesses, that may be making an extremely small profit, that are helped by not taking a 19% chunk out of their funds!

You have to agree that it was a bit of an own-goal by Gordy to create the 0% corp tax band without thinking of the implications of thousands of shop-keepers, window-cleaners, etc, suddenly incorporating in order to then distribute 10K profits tax-free! hence why the loophole was closed. It's not that difficult really!

Re: 0% corp tax band

And who determines what a "genuine" small company is? You...the IR? :rollin

Mailman

0% corp tax band

"BUT...how does one take advantage of that 0% tax band since the instant you take money out of the business means you will get taxed at 19%?"

It depends on who you mean by "one". If you mean "how does THE COMPANY take advantage..." then it can do so by not squandering the small profit through distributing it to the shareholders. Instead, it can be used to fund further expenditure/investment in future years.

If you mean "how do I personally take advantage...": you don't. The 0% corp tax band is designed as a tax break for your COMPANY, not for you personally to take advantage of.


"And whats the point of leaving that money in the business if you cant touch it?"
...so that a genuine small business that makes small profits has an incentive to reinvest its profits rather than distribute them to its shareholders.

You can touch the money, but you'll be taxed at the normal rate if you do.

Re: divs

BUT...how does one take advantage of that 0% tax band since the instant you take money out of the business means you will get taxed at 19%?

And whats the point of leaving that money in the business if you cant touch it?

Mailman

divs

If you take the money out as dividends then you are in effect loosing the 0% band. As a consequence the sliding scale band up to 50K doesnt apply (because it only exists to give the benefit of the 10K at 0%) and all gets hit at 19%

Re: corp tax

Well, actually my profit will be slightly more than 10K so being above the base rate of less than 10K, and so in this way it seems not to make any difference whether retained or distributed, isn't it? The CT tax will be the same... from what you are saying at least....I am now confused

mathematical equivalent of full CT (dividends out):
First 10,000 --- ?
Between 10,000 and 50,000 ?
50,000 and above --- ?

mathematical equivalent of reduced CT (dividends in):
First 10,000 --- nought 0%
Between 10,000 and 50,000 --23.75%
50,000 and above --- 19%

Jarek

corp tax

1. Corp tax is a company tax on PROFITS, irrespective of whether you distribute those retained profits.

2. If you took money out as salary, so your profits would reduce (since wages are a form of overhead)

3. If you took money out as dividends (ie. distributing the company's profits to its shareholders), the recipient of the dividend (ie. you) receive a tax credit of 10%. But, dividends (at basic rate) are only taxed at 10%, so you don't pay any futher tax.

4. What the new legislation does is say that IF your profits were in the zero-percent corp tax band, and you choose to distribute those profits to the shareholders rather than keep them in the company for further expenditure in future years, your company will attract a corp tax of 19%.

It really is not that difficult.

Re: Not 0% starting rate

You pay CT on profits, so does not matter of you distribute it or not. Just that if you do you pay a minimum of 19% rather than the lower rates you might pay on small profits. (Zero below 10k).

What else has bastard Brownstuff got in store for "rich" non-service owner director companies like mine that barely takes 10k a year I wonder?

Beat me why anyone ever bothers. We should all be swamp donkeys and let these fantastic immigrants take care of us as we are assured they are going to take care of our elderly.

Re: Not 0% starting rate

HAHA! :rollin

Ok...if the money is sitting in your business account do you pay CT tax on it then? I would have thought not?

Wouldnt you only pay tax on it when you distribute it through salaries and dividends?

If not then arent you paying CT twice...once when the money is sitting in your business account and then again when you disburse the money through dividend payment? :x

Mailman

Not 0% starting rate

Can somebody provide the simple calculation as the one for CT with zero starting rate when the money is not being retained in company and taken as dividends. How it would be taxed then.

mathematical equivalent:
First £10,000 --- ?
Between £10,000 and £50,000 ?
£50,000 and above --- ?

cheers,
Jarek

Re: 0% starting rate

Fraid not mailmanz. The things you mentioned are capital items so they do not have the affect of reducing the companies profit (directly) and consequeny lowering of the CT payable. [They have the affect over a number of years due to capital allowances].

If you had a 20k profit and spent 10k on computers you still got a 20k profit [Actually 15k due to first year capital allowances].

If you had a 20k profit and increased salarys by 10k you would only have a 10k profit since this is an expense.

Hopefully you are now completely confused ...:-)