For the terminally bored/worried etc, I think this is the correct guidance.
http://www.icas.org.uk/site/cms/down...le_profits.pdf
Clare summed it up in rather fewer words though.
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Reply to: Taking Dividends Out Of Co Tax Funds
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Previously on "Taking Dividends Out Of Co Tax Funds"
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Originally posted by Clare@InTouch View PostIf it's a bad debt then it's treated like an expense, and reduces your profit by the original value that it increased your sales by, so could turn your P&L bottom line into a loss. What you need to be able to do is justify that at the time you declared the dividend you had sufficient profits and no reason to believe that you had any bad debts. This is of course assuming you get to the stage where your company can't pay it's CT and you have to ask HMRC for time to pay, and have to explain why you can't pay them but you took money out yourself!
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Originally posted by psychocandy View PostOK, yeh, I guess it gets a bit complicated though if it becomes a bad debt?
So, even though the money in the account is CT/VAT money, its ok to take because you know the invoice will be paid soon. And, yes, dividend is based on P&L done by my accountant who, as you say, has included this months invoice (not yet paid).
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Originally posted by Clare@InTouch View PostYes, because as soon as an invoice is raised it's effectively increasing your profit as far as the Profit & Loss account is concerned (accounts are prepared on an accruals basis). Assuming you have the funds in the bank, obviously, and you're happy it's not going to be a bad debt!
So, even though the money in the account is CT/VAT money, its ok to take because you know the invoice will be paid soon. And, yes, dividend is based on P&L done by my accountant who, as you say, has included this months invoice (not yet paid).
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Originally posted by psychocandy View PostI'm sure this has been asked before but can you take dividends based on profits from invoices not yet paid? i.e invoiced but not recieved the cash yet
But as Claire says, it is poor risk management. A director has a legal duty to operate his company legally and safely. It is far better to get to the point where dividends are taken after the event, i.e. when you know what the available funds are. If that means leaving some gross income in the company until year end to maintain an adequate capital reserve, then that's what you should do.
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Originally posted by psychocandy View PostI'm sure this has been asked before but can you take dividends based on profits from invoices not yet paid? i.e invoiced but not recieved the cash yet
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I'm sure this has been asked before but can you take dividends based on profits from invoices not yet paid? i.e invoiced but not recieved the cash yet
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Originally posted by kaiser78 View PostMy accountant is saying I am not allowed to draw out any funds that are provisioned for tax ? My previous accoutant mentioned this - can anyone please clarify ?
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Originally posted by Clare@InTouch View PostThe danger is that you don't get another contract (illness, recession, broken legs etc) after you've taken too much out - in which case you'd not have enough at year end. Before any dividend is paid out the directors should check the financial situation of the company (management accounts for example) and ensure there are sufficient profits. You're not checking, or you're paying out even when there aren't profits. Either way it's technically wrong.
All this does tend to come out in the wash and there's no major problem as long as you can pay the tax when it falls due, and your accounts at year end show an overall profit, but it's not how we'd advise anyone to run the company because of the potential issues above.
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The danger is that you don't get another contract (illness, recession, broken legs etc) after you've taken too much out - in which case you'd not have enough at year end. Before any dividend is paid out the directors should check the financial situation of the company (management accounts for example) and ensure there are sufficient profits. You're not checking, or you're paying out even when there aren't profits. Either way it's technically wrong.
All this does tend to come out in the wash and there's no major problem as long as you can pay the tax when it falls due, and your accounts at year end show an overall profit, but it's not how we'd advise anyone to run the company because of the potential issues above.
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Thanks for the replies. I always make sure I have company funds available at year end to cover any taxes owed. It is just whilst I am building my savings pot during the year, especially when out of contract my compamny balance is less than potential tax owed until it builds again.
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A company has to have profit in order to pay dividends. That doesn't just mean the money in the bank, but the profit after tax. An example:
Sales £10,000 - tax on this would be £2,000.
This means you have £10,000 sat in your bank account as the CT isn't due until 9 months after your year end. You take that whole £10,000 as a dividend. But there's 20% tax to pay on the sales, which means that of the £10,000 you took, £2,000 should have been left within the company to cover that tax. Your company cannot now pay it's debt, and your accounts will show a loss:
Sales £10,000
CT £2,000
Dividends £10,000
Loss £2,000
As dividends can only be paid from profit, the extra £2,000 you've taken is technically illegal and will be transferred to directors' loan account.
The best thing you can do is to open a separate business savings account and transfer a set percentage of each invoice into that account each month. That way you'll have enough set aside to pay your tax, and won't accidentally pay it out as a dividend.
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You can only draw dividends from company profits. Money put aside for tax is not profit so your accountant is correct.
However, if you are making 6k monthly profit when in contract but only taking 3k dividends then you can reserve that 3k for later.
Does your accountant produce a PnL statement each month?
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Taking Dividends Out Of Co Tax Funds
My accountant is finalising my co accounts for 2010-11. What I have always been doing is drawing a salary /dividend every month as per normal, even when not in contract which means the savings pot does drop, and when in contract build up the funds pot which then covers the taxes at year end.
My accountant is saying I am not allowed to draw out any funds that are provisioned for tax ? My previous accoutant mentioned this - can anyone please clarify ?Tags: None
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