Company Year End / Divs etc

[philip@wellwoodhoyle]

Thanks for that WHA, most enlightening. Do you know how to treat it in the example I gave where some of the work was done on a speculative basis in a previous year and then sold to a client (with some customisation) in a subsequent year? Seems to me I could be forever allocating my profits across several tax years as I reuse work I have developed previously.

You don't have to be forever re-allocating income. At each year end, you have to use your judgement to make whatever provisions you feel are reasonable given the circumstances at that time. As for speculative work, you only need to bring it in as work in progress if there is a degree of certainty that it will eventually be billed and paid for - if there is any doubt, you are OK to leave it out.

[ittony]

You don't need to change the way you invoice nor the way your suppliers invoice you. What you do need to do is make adjustments (journal entries) in your final accounts (and therefore your corporation tax), to make sure that your income and expenses are put into the tax years that they fairly relate to, not the tax years in which the invoices were raised or that the monies were paid.

For example, if you have been doing a contract for say 8 weeks, 7 weeks of which are in 2006/7 and the eight (and invoice date) is in 2007/8, then you continue to invoice as previously, but 7/8ths (or a more accurate figure if you have accurate time/costing records) needs to go in your 2006/7 accounts and be taxed in the 2006/7 tax year.

As to your suppliers, you don't need to know when they did the work - if you are bringing in 7/8th of your income, then makes sense to bring in 7/8th of your suppliers bill (i.e. the "matching" concept) or again, you can be more accurate if you have more accurate/relevant way of matching your costs against revenue.

Thanks for that WHA, most enlightening. Do you know how to treat it in the example I gave where some of the work was done on a speculative basis in a previous year and then sold to a client (with some customisation) in a subsequent year? Seems to me I could be forever allocating my profits across several tax years as I reuse work I have developed previously.

[philip@wellwoodhoyle]

You don't need to change the way you invoice nor the way your suppliers invoice you. What you do need to do is make adjustments (journal entries) in your final accounts (and therefore your corporation tax), to make sure that your income and expenses are put into the tax years that they fairly relate to, not the tax years in which the invoices were raised or that the monies were paid.

For example, if you have been doing a contract for say 8 weeks, 7 weeks of which are in 2006/7 and the eight (and invoice date) is in 2007/8, then you continue to invoice as previously, but 7/8ths (or a more accurate figure if you have accurate time/costing records) needs to go in your 2006/7 accounts and be taxed in the 2006/7 tax year.

As to your suppliers, you don't need to know when they did the work - if you are bringing in 7/8th of your income, then makes sense to bring in 7/8th of your suppliers bill (i.e. the "matching" concept) or again, you can be more accurate if you have more accurate/relevant way of matching your costs against revenue.

[despot]

If you are doing a fixed price job for some deliverables, then you can invoice on the deliverables (not recommended as you will probably never get paid given the track record of most clients for working to a time schedule) or you can invoice on the basis that you will deliver the agreed deliverables but bill for the fixed price cost based on your estimated effort (e.g. time) to do the job.

So Job X has 3 deliverables and will require 80 man days of your best employee (e.g. you) over a 4 month time period (say).

You bill for 20 man days of effort every calendar month. At least, that is the way I do it!! Your contract wording will focus on the deliverables and the fixed price component which can only be computed based on your estimate man day effort x day rate!

Not sure if that answers your question?

[ittony]

ASB is correct. Corporation tax profit is based on when the work was done, not when it was invoiced nor when it was paid for.

Hi there. I would be very grateful if you could please expand a little on how how this rule works in practice. If I invoice a client for a job I've just finished, the majority of which was done in the tax year just ended, do you mean that I have to split the invoice into two components for before and after the 5th April? Even if the job was done on a fixed-cost basis and I wouldn't be making the development dates transparent to the client? And having subcontracted some of the development, do I need to find out how my supplier's time was split over the two tax years? And what happens if I bill a client for x days work this year but most of the development was done on a speculative basis in the previous tax year?

Thanks!

[PAG]

So does that mean lets say for example I have £10k profit in my business account on my company year end. I therefore owe corp tax on that so £10k - 20% = £8k, then I decide a week later in my new company year I want to pay a dividend based on £8k do I pay corp tax again on that £8k even though I would of already set aside 20% of the £10k at my company year end ? Just trying to work out if I should bring the £ in my business account down to the bare minimum to avoid double application of corp tax at company year end/

Im confused

CT is only paid once on the profit. so if you left 8K in your co a/c (not accounting for interest) and next year worked harder and made profit of 10k again CT is due on 10K only not 18K. hope this makes sense.

[MobileCheese]

Payment of dividends does not change whatever corporation tax is due on the profits. .

So does that mean lets say for example I have £10k profit in my business account on my company year end. I therefore owe corp tax on that so £10k - 20% = £8k, then I decide a week later in my new company year I want to pay a dividend based on £8k do I pay corp tax again on that £8k even though I would of already set aside 20% of the £10k at my company year end ? Just trying to work out if I should bring the £ in my business account down to the bare minimum to avoid double application of corp tax at company year end/

Im confused

[Nixon Williams]

Profits are calculated by taking all the expenses including salary from the income of the company. There are a few adjustments to take account of but basically that is it.

The amount left (hopefully there is some left!) is the profit. Corporation Tax is calculated at 20% (from 01/04/07, 19% before that). What is left can generally be paid as a dividend.

Remember that the level of dividends not not change the amount of Corporation Tax that is payable.

The tax is due 9 months + 1 day after the accounting period.

Accounts are due at Companies House 10 months (maybe slightly shorter on year 1) of the period end.

Alan

[philip@wellwoodhoyle]

ASB is correct. Corporation tax profit is based on when the work was done, not when it was invoiced nor when it was paid for. Payment of dividends does not change whatever corporation tax is due on the profits. The company can have whatever tax/accounting year it choses - it is not 5 April nor any other fixed/arbitrary date - the directors have the choice and can choose whatever year end they want (although there are limitations as to how often it can be changed - extended only once every 5 years).

[MobileCheese]

1) The turnover applies to the year in prgoress. Whether it is paid or not is irrelevant. Whether it was invoiced is also largely irrelevant since work in progress should be accounted for if it is expected to be paid.

2) You pay CT on the profits earned. Paying a dividend make no difference to these, thus no change to the Ct. Depending on your own personal tax position then when the dividend is paid might make a difference.

Cheers and before anyone asks I do have an accountant but just remebered it was year end and its playing on my mind now.

How do they define 'profit earned', what I have been doing is pay myself salary monthly then usually ever quarter paid myself a div. To work out the div I would minus from the business account future operating cost vat I owed, any corp tax from previous div payment, then take 19% off this and the remainder I paid as divs. So at the moment I have £xk set asside for corp tax is this all I need to pay, or is there a second set of corp tax I dont know about ?? sh*t

Thinking Im getting confused companies house says the following is due for me and when,

Accounting Reference Date: 30/04
Last Accounts Made Up To: (NO ACCOUNTS FILED)
Next Accounts Due: 27/02/2008
Last Return Made Up To:
Next Return Due: 25/05/2007

[despot]

The financial year accounting period is fixed at 5th April or thereabouts each year. I think the company accounting period that you refer to must be the annual return date for Companies House.

What my accountant does is to cut off the accounting period ending 31 March 200? and then use the cash flow into and out of the business account prior to that date as the basis for any P/L calculation.

I then take dividends from what is on the balance sheet for that accounting period. Any surplus monies are then subjected to CT.

It doesn't mean that it is right.

[ASB]

1) The turnover applies to the year in prgoress. Whether it is paid or not is irrelevant. Whether it was invoiced is also largely irrelevant since work in progress should be accounted for if it is expected to be paid.

2) You pay CT on the profits earned. Paying a dividend make no difference to these, thus no change to the Ct. Depending on your own personal tax position then when the dividend is paid might make a difference.

[MobileCheese]

Hi,

Im comming upto my first company year end on the 30th April and have a few questions.

1. The company year end is the 30th April and Im due to get an invoice payment as well on the 30th April as well, will this invoice payment be included in this year end (30th Apr 2007) or next (30th Apr 2008) ?

2. Also I was due to take a dividend mid April, would I be better off waiting to pay it just before the 30th or does it not matter. Im not sure what happens company year end and someone mentioned I would pay corp tax on any profit in the company at year end so am I better off just trying to get as much out of the company as I can before year end, obviously leaving in the company account money I have set asside for vat and corp tax I owe on div payments I have already made ?

Cheers