Reply to: Do I legally have to leave the Tax and VAT in the limited company?

[JackD]

Not sure what you mean but if you're under the impression that profit is calculated inclusive of VAT then that's not correct. The basics of working out the maximum dividend you can declare is:

Sales (excluding VAT) = A
Expenses (excluding VAT) = B
Profit/Loss = A - B = C
Corporation Tax = C x 19% = D (If C is a profit)
Retained profit/loss = Maximum Dividend = C - D = E

Yeah that’s what I thought - the £11k figure used in my original post and your previous comment was inclusive of VAT. So my maximum dividend would be lower

[malvolio]

P.S. Please speak to your accountant in detail about this before it's all too late. If you're paying them, this is basic advice you should be receiving from them. They'll be able to explain in much more detail about the implications and how things work!

Agreed. Our concern is not so much the mechanics of what is being proposed by the OP but their apparent total ignorance of how it is all supposed to work.

[Craig@Clarity]

P.S. Please speak to your accountant in detail about this before it's all too late. If you're paying them, this is basic advice you should be receiving from them. They'll be able to explain in much more detail about the implications and how things work!

[Craig@Clarity]

Thanks Craig, in your scenario it sounds like people are OK to take dividends without accounting for the VAT?

Not sure what you mean but if you're under the impression that profit is calculated inclusive of VAT then that's not correct. The basics of working out the maximum dividend you can declare is:

Sales (excluding VAT) = A
Expenses (excluding VAT) = B
Profit/Loss = A - B = C
Corporation Tax = C x 19% = D (If C is a profit)
Retained profit/loss = Maximum Dividend = C - D = E

[Craig@Clarity]

If I paid my self my yearly salary (10-12k) in the first month as a signing incentive, then only took dividends when the company is profitable, why is that illegal? A lot of companies provide signing bonuses, infact, I’m sure there’s alot of tech startups, losing money, who are also paying sign on bonuses.

In this scenario, picking up on the point of all your salary in the first month, if you intend to whack the full £10-£12k in April and report it via RTI, then this will generate an income tax and Employer's NIC bill.

[JackD]

To answer your question you have asked, let's assume the £1k expenses in the month is your salary. You can legally take this out. That leaves £11k in the business account. Out of that £11k, the maximum dividend that you can declare and pay is £7,290 ((£10k - £1k) less CT @ 19%). Anything else left in your business bank account that you want take out at that point is a directors loan. All legal.

Thanks Craig, in your scenario it sounds like people are OK to take dividends without accounting for the VAT?

[Craig@Clarity]

Hi All,

I know this isn’t advisable and the majority wouldn’t do it. But is it legally sound?

I’ve recently setup a limited co for outside work. I’d like to front run my dividend allowance and take out as much as possible for the first few months.

For easy math:
Monthly invoices paid: 10k + VAT.
Expenses: £1k
Monthly business account: £11k
Monthly VAT owed: £2k
Monthly Corp tax owed: £1.9k

Let’s assume there’s no other income, no other costs to the scenario.

There’s £11k in the account and I owe £3.9k in Tax and VAT.

Can I take out a mixture of dividends and salary for the full £11k in the short term and use future earnings to pay for the Tax and VAT?

Due to personal circumstances I’d like to take out as much as possible for the next few months, but don’t want to do anything illegal.

To answer your question you have asked, let's assume the £1k expenses in the month is your salary. You can legally take this out. That leaves £11k in the business account. Out of that £11k, the maximum dividend that you can declare and pay is £7,290 ((£10k - £1k) less CT @ 19%). Anything else left in your business bank account that you want take out at that point is a directors loan. All legal.

[Kugel]

I was only asking for clarity on if it’s illegal and why. If I paid my self my yearly salary (10-12k) in the first month as a signing incentive, then only took dividends when the company is profitable, why is that illegal?

No, you do not have to leave CT and VAT in Ltd. But it is REALLY a good idea for someone with your level of financial discipline and knowledge of how Ltd works.

A lot of companies provide signing bonuses, infact, I’m sure there’s alot of tech startups, losing money, who are also paying sign on bonuses.

I am sure these startups are not losing HMRC's money and do not spend CT and VAT money on sign on bonuses. [/s]

[malvolio]

Mods - can we lock this thread. Troll or idiot, it's unclear which are are trying to help here.

[malvolio]

I fully understand it isn’t advisable and it’s best not to do. I’m unclear if it’s illegal. I will not do it illegally. I agree that it’s best to avoid doing so, but there’s always going to be niche scenarios that the rule of thumb doesn’t account for.

I was only asking for clarity on if it’s illegal and why. If I paid my self my yearly salary (10-12k) in the first month as a signing incentive, then only took dividends when the company is profitable, why is that illegal? A lot of companies provide signing bonuses, infact, I’m sure there’s alot of tech startups, losing money, who are also paying sign on bonuses.

As I said at the top of this thread, it isn't your money, nor is it the company's. The money you are wanting to take out is owed to and therefore owned by the government and by any sensible interpretation of the law you using for your own benefit is theft by misappropriation, pure and simple. So yes, strictly speaking it is illegal for you to take it for yourself, and promising to put it back at some unspecified date is irrelevant.

As for start-ups, they are spending money to build the business and that "overspend" (it isn't, but let's not get too technical) money will have been identified and journaled in their accounts and will eventually be covered. There is no intention to remove it for something else. That is not what you are wanting to do anyway.

But we could care less, it won't be us with unclearable debts, false accounting and overdue taxes, penalties and interest to pay. You will be in deep trouble before much longer unless you start to learn how corporate finance actually works and what you are legally required to do as a director. Until then, fill your boots. After all, it's not a crime if you don't get caught, is it.

[Fred Bloggs]

Three pages on, here's the answer the OP wants to hear -

OP, it's absolutely fine, just do what you wish with the money.

OK now?

[jamesbrown]

the tax wouldn’t be due for 12-18months time

It doesn't matter when the payment is due (over the following year), the tax is a current liability on your balance sheet.

There's a variety of ways we can say the same thing but, ultimately, it's not a good idea, and if you keep asking the same question, it's going to look like trolling of a professional forum. Just sayin' like.

[JackD]

You aren't getting the message are you.

I fully understand it isn’t advisable and it’s best not to do. I’m unclear if it’s illegal. I will not do it illegally. I agree that it’s best to avoid doing so, but there’s always going to be niche scenarios that the rule of thumb doesn’t account for.

I was only asking for clarity on if it’s illegal and why. If I paid my self my yearly salary (10-12k) in the first month as a signing incentive, then only took dividends when the company is profitable, why is that illegal? A lot of companies provide signing bonuses, infact, I’m sure there’s alot of tech startups, losing money, who are also paying sign on bonuses.

[northernladuk]

A debt isn’t due, until it’s due is it?

You aren't getting the message are you.

[JackD]

A company is insolvent when it cannot pay its debts. As a director, you have a responsibility to ensure that your company is solvent. When it is apparent that you are trading insolvently, you have further responsibilities, like preventing further losses to creditors and not making preference payments (i.e., payments to yourself), for example. It sounds like you haven't really read about the very basics of running a company. Perhaps you shouldn't be running a company.

Thanks, sounds like the idea is a non starter.

The company would be insolvent when it cannot pay its debts, but the tax wouldn’t be due for 12-18months time, it seems a waste to have the money sat there earning nothing, when it could be being put to better use. I assumed it wouldn’t be illegal, as companies are always creative with their cash flow.

A debt isn’t due, until it’s due is it?