Reply to: A question for/ref IR35 insurers

[Ketto]

Use Freeagent.

[matt5930]

Which software are you able to do this ? I’ve always struggled to find one that gives me an estimate of what I can take out

[TheCyclingProgrammer]

I've said it before and I'll say it again, if you don't have a system for keeping your books that allows you to see at a glance what your company's retained profit is (and therefore the maximum you could withdraw as a dividend), you need a better system. Being able to see your current position at any point is one of the best things about using online accounting software. I can see my current years net profit and total distributable reserves, so I'd have no excuse for getting this wrong.

[psychocandy]

This is annoying, especially when it is being done deliberately rather than through carelessness.

A few years back we had a few instances where directors were striking their company off at Companies House and debts owed to HMRC were written off in most cases - very frustrating and unfair.

On a positive note, this no longer seems to be happening as HMRC are objecting to the strike off of any company with outstanding liabilities/returns until all tax is settled which is good news.

Totally agree with you. BTW - I'm with NW and you guys seem to make 100% sure clients don't do this which is excellent and the right way to do things.

I guess its difficult for HMRC sometimes because if the moneys been spent then its gone in some individuals cases. Like I said, I have personal experience of family member who did similar (although self-employed) and got £1000s knocked off his tax bill by HMRC.

In his case, it was stupidity and greed and a case of "well I've got money here lets spend it down the pub". Then ignore letters and hope it all goes away.

[Martin at NixonWilliams]

Annoying thing is loads of people get away with it though and end up paying less. Including family member of mine who did exactly that.

This is annoying, especially when it is being done deliberately rather than through carelessness.

A few years back we had a few instances where directors were striking their company off at Companies House and debts owed to HMRC were written off in most cases - very frustrating and unfair.

On a positive note, this no longer seems to be happening as HMRC are objecting to the strike off of any company with outstanding liabilities/returns until all tax is settled which is good news.

[psychocandy]

Never take dividends unless there is profit. My accountant is (rightly) hot on this.

But then looking at other forums, they're full of stories of people bleating about the big bad HMRC going to take their house because they owe £x000s in CT/VAT and they can't pay it. Its always not their fault because business wasnt as good as they thought and they took the money and thought they could pay it back.

Never understand this. I know it can happen to a certain extent but surely basic rule is only spend money thats profit and leave well alone the money for tax/VAT.

Annoying thing is loads of people get away with it though and end up paying less. Including family member of mine who did exactly that.

[Clare@InTouch]

I always do this. My accountant bases any dividends possible on any retained profit including invoices that have been submitted.

I wouldnt pay a dividend out on a future invoice though. Surely thats illegal or, at least, is a directors loan?

Distributable profit is based on invoices raised regardless of whether they have been paid, so that's fine. The company still has the asset base available it's just a debtor rather than actual cash.

Dividends can only be paid from profit, so if the company has profit you're fine. Where you get onto dodgy ground is when you start paying dividends when the company is showing a retained loss as that means you're probably withdrawing your CT money to fund your own lifestyle. If you can't then pay the CT when it falls due HMRC are highly unlikely to be sympathetic.

That's the way most people seem to get into trouble - they take too many dividends, do not account properly for retained profits and keeping tax money aside, then have to take loans to pay taxes etc etc.

[psychocandy]

This is one of the most interesting and useful (not to mention excellent) pieces of information I've received in months. Thank you.

I always do this. My accountant bases any dividends possible on any retained profit including invoices that have been submitted.

I wouldnt pay a dividend out on a future invoice though. Surely thats illegal or, at least, is a directors loan?

[Contreras]

I suppose I'd be interested to hear how this all turns out - can you let us know when it's resolved and what happened. Most likely it's a minor thing where there some BIK is due on an undeclared director's loan.

The postition was fully rectified by the time our accounts were filed and showed a healthy profit. I appreciate that there is no reason for HMRC to look further, but if they did....

[ASB]

Distributable Profits Guidance

leads to the icaew guidance.

[Wanderer]

This is one of the most interesting and useful (not to mention excellent) pieces of information I've received in months. Thank you.

I suppose I should give a reference to back up my statement then! See Can I base my dividend on invoices?. You may also want to make sure you and your account are familiar with HMRC's manual section CTM20095 which deals with dividends.

I'd be interested to hear how this all turns out - can you let us know when it's resolved and what happened. Most likely it's a minor thing where there some BIK is due on an undeclared director's loan.

[TheCyclingProgrammer]

This is one of the most interesting and useful (not to mention excellent) pieces of information I've received in months. Thank you.

As an addendum to Wanderer's point, if you declare a dividend before you have the cash, you should still ensure the dividend paperwork is drawn up correctly on the date you wish to declare the dividend (so minutes and vouchers) and in your books show a credit to the director's loan account.

This removes any ambiguity over the date the dividend is declared and considered paid (which might be important for tax planning purposes).

You are then free to draw the money down when it's available.

Normal caveats about having enough profit to cover the dividend in the first place (although I'm sure you're well aware of this by now).

[TheMrs]

Remember than you can also pay a dividend on the day you issue an invoice, there is no strict requirement for you to have your money in the bank before you can pay out the dividend.

This is one of the most interesting and useful (not to mention excellent) pieces of information I've received in months. Thank you.

[ASB]

There is no certainty the divis were nominally illegal.

consider. Bill 20k. No exes, profot 20k. Arguably a 20k divi is ok. The ct is not due yet, if there is genuine expectation of being able to pay the ct when it falls due then it is defendable.

[Wanderer]

In our first year of trading we made a fundamental mistake in granting interim dividends without having first set aside the corporate tax notionally due at any point. This was in the context of having a secure contract, with a healthy notice period from the client, in a market with insatiable demand etc etc. Not a mistake we have repeated this year nevertheless.

The postition was fully rectified by the time our accounts were filed and showed a healthy profit.

So you were careless and took dividends ultra vires. These should have been accounted for as a director's loan and you would have to either pay interest on the loan (at the official rate, currently 4%) or account for the loan as a beneficial loan and pay tax on the BIK.

I really don't think this is going to be such a big deal, especially as if it was all squared up by the end of the company year. Remember than you can also pay a dividend on the day you issue an invoice, there is no strict requirement for you to have your money in the bank before you can pay out the dividend.

Probably the most that will happen is that you will have to pay BIK on the 4% interest due on the director's loan you took out. So a £20k loan over 6 months at 4% will add £400 to your taxable income for that year. This will probably cost you more in accountant's fees than tax and penalties...