Reply to: Spending the Corporation Tax

[Jubber]

Don't spend your tax money if you are not forecasting making a profit to make up the salary payment. It could be classed as wrongful trading. If you know you are going to go insolvent and take the money for yourself then you will become personally liable as director.

I am forecasting making a profit - the company has made a profit for years .... but what happens IF another contract does not appear?? I do not know that the company will be insolvent.... who does? What I was asking is, is it worth the risk? Should I let the company go into the red while looking for more work? If no further work can be found because of the downturn in IT and the company goes pop, would the taxman say ...

"Never mind Jubber - you tried hard - we'll write this off"

or would it be

"Bend Jubbs - we're coming for you!"

[frank size]

Tax Lord - the figures are fictional - I just used 20k as an example. It was the principle of spending the tax money to keep the company open while looking for work. It hasn't come to this yet - and it won't - I was just asking the question to see if the risk was worth it. i.e. spend the tax hoping to get more work to pay it back - but what the penalty would be if no work was found and the tax spent.

Don't spend your tax money if you are not forecasting making a profit to make up the salary payment.

[Jubber]

If you have approx £20k put aside for corp tax, then the company would have made profits of approx £100k ( ie £100k x 21% = £21k tax), therefore £80k must have been taken as a dividend. If you then pay yourself a salary of £20k, your company would still have a profit of £80k (£100k minus £20k salary) and therefore a corp tax bill of £16k, with no funds left in the company. The director has effectively taken an illegal dividend and would be asked to sell their worldly goods to pay off the outstanding tax.

Tax Lord - the figures are fictional - I just used 20k as an example. It was the principle of spending the tax money to keep the company open while looking for work. It hasn't come to this yet - and it won't - I was just asking the question to see if the risk was worth it. i.e. spend the tax hoping to get more work to pay it back - but what the penalty would be if no work was found and the tax spent.

[thunderlizard]

Salary should only be paid from profits....if your contract stops, so should your salary.

The company shoudl always have provision in the company to cover all tax liabilities at anytime.

What expenses would be legit if there was no income.....a few interview expenses??? hardly £20k worth..

sorry, but this is the least true advice I have ever read, even on an internet forum. Well, I suppose the second bit is true in spirit.

[chris79]

If you are a director you are exempt from NMW unless you have a formal contract of employment as a director of the company, and then its according to the contract!

Correct, does not apply to company directors (NMW).

[Little'Old Me]

What about the NMW? I was in a situation last year where the only money in the account was the corp tax owed, I just stopped paying myself a salary as my company had no income.

Am I not obliged to pay my employee (me) NMW?

If you are a director you are exempt from NMW unless you have a formal contract of employment as a director of the company, and then its according to the contract!

[gingerjedi]

What about the NMW? I was in a situation last year where the only money in the account was the corp tax owed, I just stopped paying myself a salary as my company had no income.

Am I not obliged to pay my employee (me) NMW?

[deckster]

Basically - if I paid a 20k divi and spent it on a long holiday then I would expect to get clobbered. But if I spent the money on trying to keep the company going and get further work and pay staff - would I still get clobbered?

This is I suspect the difference between being a director and being an employee. An employee will have a reasonable expectation of being paid no matter what. As a director, you have wider responsibilities and you have a duty to wind up the company when is it clear that your assets will no longer cover your liabilities. Continuing to pay yourself a salary in this situtation could, depending on circumstances, be deemed negligent. IANAA but there is to my mind a clear difference between trying to keep a business with employees going, and a one-man-band paying himself with the tax money.

[Jubber]

Just spoke to the accountant.

Recommendation is not to spend the tax - if funds within the company fall to that level, close the company and pay all tax owing.

As expected.

If I do spunk the tax, Hector may come after me for it. He said that personally he would not take the risk of spending it while looking for further contracts.

I'm not at company closing point yet as I've always worked on a 6 month war chest - but I'm halfway there.

[Jubber]

The company has NO reserves to pay any salary or expenses ...

Profit £95
CT £20
Divi £75
Retained profit is ZERO, bank balance is £20K cause you have CT to pay.

How can you continue to pay salary or expenses if the company has no retained profits or income streams

Yes - I realise the point you are making - my question is - would I be held as negligent if I continued to pay salaries etc.

Basically - if I paid a 20k divi and spent it on a long holiday then I would expect to get clobbered. But if I spent the money on trying to keep the company going and get further work and pay staff - would I still get clobbered?

[DaveB]

The company has NO reserves to pay any salary or expenses ...

Profit £95
CT £20
Divi £75
Retained profit is ZERO, bank balance is £20K cause you have CT to pay.

How can you continue to pay salary or expenses if the company has no retained profits or income streams

If you are a proper business then you are operating at a loss which is perfectly ok. Many businesses do this prior to either recovering and getting back into profit or going bust.

Just where you end up trading while insolvent I'm not sure since once you know you business does not have the funds to cover it's liabilities then that is technically what you are doing, I think.

IASTNAA.

[Robot]

How about this scenario for any lurking accountants.

Let's say there is 20k in the company put aside for Corporation Tax due in October and no other funds. This money is used between now and October to pay salary and expenses (legit) between now and October. The worst possible thing happens and no more work is found for the company.

Come October the 20k has been spent on legitimate salary and expenses, (including accountant fees no illegal divis have been drawn) the 20k CT bill is now due and there are no funds in the company to pay it.

The company is now insolvent and is wound up. Could the director of the company be held as negligent?

The company has NO reserves to pay any salary or expenses ...

Profit £95
CT £20
Divi £75
Retained profit is ZERO, bank balance is £20K cause you have CT to pay.

How can you continue to pay salary or expenses if the company has no retained profits or income streams

[Tax Lord]

If you have approx £20k put aside for corp tax, then the company would have made profits of approx £100k ( ie £100k x 21% = £21k tax), therefore £80k must have been taken as a dividend. If you then pay yourself a salary of £20k, your company would still have a profit of £80k (£100k minus £20k salary) and therefore a corp tax bill of £16k, with no funds left in the company. The director has effectively taken an illegal dividend and would be asked to sell their worldly goods to pay off the outstanding tax.

[Jubber]

Salary should only be paid from profits....if your contract stops, so should your salary.

What are you talking about - if your contract stops so should your salary ? What numptyness.

The company shoudl always have provision in the company to cover all tax liabilities at anytime.

I agree

What expenses would be legit if there was no income.....a few interview expenses??? hardly £20k worth..

Accountants - insurance - travel to interviews - home as office - IT equipment - software - bookeepers - should I go on ......

[Olly]

Salary should only be paid from profits....if your contract stops, so should your salary.

Who on earth told you that? If you paid for that advice then don't give them another penny....if you just guessed then please don't state it as fact.

Both those points are utter rubbish - as those above have mentioned.