Spending the Corporation Tax

[Jubber]

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?

[YNWA]

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..

[DaveB]

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..

Dividends should only be paid from profits, not salary. Either way I'm not sure what HMRC would make of it.

*IF* the salary was suffience to drain the funds prior to the last peice of wrk being undertaken and could not be shown to have been artificially raised specifically to remove funds from the company then you *may* be ok. I wouldnt want to try it.

IANAA. YMMV.

[chris79]

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

Not true? I've been out of mainstream work now for almost 5 months and I still pay a salary. That would only be the case if you took the full invoice amount and paid most of it as your salary each week leaving your business account bordering on bankrupt on a constant basis.

Then again if you are classing 'dividends' as salary, then you should only be taking dividends from cleared profits (that's after any liabilities)?

[BrilloPad]

My accountant disallows certain expenses and puts them in directors loan account : I pay off each year. One year he decided that I should have claimed certain expenses : and the company owed me £2,600 of directors loan. I misunderstood and paid £2600 in company.

Come year end I have paid out £5200 in divs more than I should. Cue one extremely irate accountant telling me that technically I am trading while insolvent and due to be banged up for a very long time. Now in this case earned the extra £5200 and just withdrew from directors loan account.

Not a situation I intend to get into again.....

[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.

[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 ......

[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.

[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

[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.