Dividend question
Discussion
Hi all,
I have a question relating to payment of a possible dividend and I am hoping someone can shed some light for me. At the end of our financial year (end of last year) I paid a dividend out of my company (I am sole shareholder and director). I would now rather that these funds went back into the company and have the payment treated as a loan from the company to me which I am now going to repay. As we have not finalised the y/e accounts for last year, and not crossed a tax year end, is there any reason why I cannot do this? My accountant seems to think it is OK.
Thanks in advance for any views.
I have a question relating to payment of a possible dividend and I am hoping someone can shed some light for me. At the end of our financial year (end of last year) I paid a dividend out of my company (I am sole shareholder and director). I would now rather that these funds went back into the company and have the payment treated as a loan from the company to me which I am now going to repay. As we have not finalised the y/e accounts for last year, and not crossed a tax year end, is there any reason why I cannot do this? My accountant seems to think it is OK.
Thanks in advance for any views.
Practically it won't be an issue (legally it would but there's a "who is to know" balance to be considered here)
But be careful of the tax impact - Section 455 (I think that's the section, I can never remember) potentially imposes a 32.5% CT charge on the company if unpaid after 9mnths from the year end.
It could be your accountant it recommending it to push the payment into your next tax year (ie soon after start April declare a divi and repay the loan) , particularly if you're at/near a tax threshold. If this is the case and the loan is repaid then it would still need to be disclosed on the tax return but immediate relief is available.
Double check the reasoning with your accountant - the fact you have one and he will therefore presumably be submitting the returns takes away the added complication issue for you. Make sure he's considered the interest charge to avoid BIK. This is not my direct field so your accountant will (/should...) know best.
I am assuming in the above the figure we are talking about is not small and therefore the sub £10k exclusions don't apply.
But be careful of the tax impact - Section 455 (I think that's the section, I can never remember) potentially imposes a 32.5% CT charge on the company if unpaid after 9mnths from the year end.
It could be your accountant it recommending it to push the payment into your next tax year (ie soon after start April declare a divi and repay the loan) , particularly if you're at/near a tax threshold. If this is the case and the loan is repaid then it would still need to be disclosed on the tax return but immediate relief is available.
Double check the reasoning with your accountant - the fact you have one and he will therefore presumably be submitting the returns takes away the added complication issue for you. Make sure he's considered the interest charge to avoid BIK. This is not my direct field so your accountant will (/should...) know best.
I am assuming in the above the figure we are talking about is not small and therefore the sub £10k exclusions don't apply.
Thanks for all the feedback.
It is a quite chunky dividend (well over the £10k mentioned).
Yes, I will avoid the 32.5 CT charge as the payment was made, and will be repaid, in 3 - 4 months. I think there is a small amount of tax to pay on the benefit of the loan, but that can't be much.
The payment came to me and will go back to the company in the same personal tax year so that's not an issue i don't think.
It is a quite chunky dividend (well over the £10k mentioned).
Yes, I will avoid the 32.5 CT charge as the payment was made, and will be repaid, in 3 - 4 months. I think there is a small amount of tax to pay on the benefit of the loan, but that can't be much.
The payment came to me and will go back to the company in the same personal tax year so that's not an issue i don't think.
Yes, S455 is the dangerous piece of legislation you don't want to trigger.
Also, unless the company charges you interest for lending you the money, you will be deemed to have received a "beneficial loan" which require that you pay Income Tax under the PAYE Benefit in Kind rules.
That means the company MUST submit a P11d after the end of the tax year. If it does not it could be fined heavilly (up to £3,000).
Also, unless the company charges you interest for lending you the money, you will be deemed to have received a "beneficial loan" which require that you pay Income Tax under the PAYE Benefit in Kind rules.
That means the company MUST submit a P11d after the end of the tax year. If it does not it could be fined heavilly (up to £3,000).
Eric Mc said:
A loan TO a company by a director is never usually a problem.
What Company Law and HMRC doee NOT like is when a director takes a loan FROM a company.
My thought was that the OP could save paying some tax in the future loaning the money back to the company if he’s happy to pay the div tax on the loan amount E.g He’s taken a 10k div, loans that 10k back to the company and pays the tax (£412.50?). In the future he wants to take a 20k div. Recalling the loan and taking a 10k div means he pays £412.50 again (total: £825) rather than £1,162.50.What Company Law and HMRC doee NOT like is when a director takes a loan FROM a company.
This is before charging interest which he could do at a fair rate (5%). Tax would obviously be chargeable on the interest so it would depend on his other income.
Rather pointless, I would say.
Once the money has been withdrawn from the company by the individual, the individual will pay income tax on that money. If a dividend, he/she pays income tax at dividend rates. If salary, he/she pays normal income tax and NI (including Employer's NI)
The company will be able to deduct the salary and employer's NI when calculating its Corporation Tax.
The company gets no Corporation Tax relief when dividends are paid.
Most people withdraw money from their companies so that they can live i.e. to fund their personal life etc.
They don't usually have the luxury of being able to take money out of their company just to put it back into the company again.
Once the money has been withdrawn from the company by the individual, the individual will pay income tax on that money. If a dividend, he/she pays income tax at dividend rates. If salary, he/she pays normal income tax and NI (including Employer's NI)
The company will be able to deduct the salary and employer's NI when calculating its Corporation Tax.
The company gets no Corporation Tax relief when dividends are paid.
Most people withdraw money from their companies so that they can live i.e. to fund their personal life etc.
They don't usually have the luxury of being able to take money out of their company just to put it back into the company again.
Not sure I understand to scorn of directors loan. Same reason people have credit cards? I used to do it quite often. Interest free loan for up to 9 months came in handy on multiple occasions.
For instance I had to pay a 40k deposit, no cash handy. Take it as a directors loan and sort it out a few months later. I have the intervening time to think about best way to liquidise that cash.
Don't do it so much these days. But it was super useful at the time.
I never paid any tax, income tax or corporation tax. Is this wrong? My accountants have always waved it through?
For instance I had to pay a 40k deposit, no cash handy. Take it as a directors loan and sort it out a few months later. I have the intervening time to think about best way to liquidise that cash.
Don't do it so much these days. But it was super useful at the time.
I never paid any tax, income tax or corporation tax. Is this wrong? My accountants have always waved it through?
Lim said:
Not sure I understand to scorn of directors loan. Same reason people have credit cards? I used to do it quite often. Interest free loan for up to 9 months came in handy on multiple occasions.
For instance I had to pay a 40k deposit, no cash handy. Take it as a directors loan and sort it out a few months later. I have the intervening time to think about best way to liquidise that cash.
Don't do it so much these days. But it was super useful at the time.
I never paid any tax, income tax or corporation tax. Is this wrong? My accountants have always waved it through?
What country are you in?For instance I had to pay a 40k deposit, no cash handy. Take it as a directors loan and sort it out a few months later. I have the intervening time to think about best way to liquidise that cash.
Don't do it so much these days. But it was super useful at the time.
I never paid any tax, income tax or corporation tax. Is this wrong? My accountants have always waved it through?
If in the UK and the company (ltd or plc) makes any profit it is liable for corporation tax. If you withdraw any money from the company (other than a loan that is repaid within time limits) you will personally also be liable for income tax of some sort.
C350Akra said:
What country are you in?
If in the UK and the company (ltd or plc) makes any profit it is liable for corporation tax. If you withdraw any money from the company (other than a loan that is repaid within time limits) you will personally also be liable for income tax of some sort.
I live in Scotland, company is registered in England.If in the UK and the company (ltd or plc) makes any profit it is liable for corporation tax. If you withdraw any money from the company (other than a loan that is repaid within time limits) you will personally also be liable for income tax of some sort.
So I've been doing it wrong by ignoring these on self assessment? I was never picked up on it, but my accountants at the time were not the best, to be fair.
I generally paid back the amounts in full within 3 months or so.
Good to know for future that it's more complex, thanks.
The 9 month pay back rule relates to the Section 455 Corporation Tax Penalty Charge.
Say you took £50,000 out of your company and decided that it wasn't salary and it wasn't a dividend. It was a loan which you fully intended to pay back (maybe).
Company Law says that you have just made an illegal loan to a connected person and, if it remained in place at the end of the financial year, a note to that effect must be included in the statutory accounts. The note needs to contain full details of the loan, the maximum amount of the loan, the interest rate being charged on the loan and the repayment terms.
If the £50,000 was paid in full within 9 months of the end of the year, then there is no S.455 penalty Corporation Tax due. However, if it is clear that the loan will not be or cannot be repaid within that 9 month period, S.455 tax will be payable.
S.455 is charged at 32.5% of the balance outstanding at the Balance Sheet date. In this case it would amount to £16,250. This MUST be stated in the Corporation Tax Return (there is a special section for it) and the £16,250 needs to be added to the "normal" Corporation Tax liability due and paid to HMRC within 9 months of the financial year end of the company.
If and when the loan is fully repaid, HMRC will refund to the company the S.455 Corporation Tax of £16,250. The company must APPLY separately for this refund and provide documentary evidence (bank statements etc) showing how and when the loan was fully repaid. This is a time consuming and messy process and can take up to 2 years to sort out (ask me how I know this).
Now for the Benefit in Kind (BIK) rules -
First of all, there is no rule regarding 9 months when it comes to the BIK charge.
Once you have taken a loan from your company AND the company does not charge you interest at the market rate, you are getting a "beneficial loan" from your employer and instantly you are liable for an Income Tax charge under the PAYE BIK rules.
The tax is calculated by comparing the interest actually charged by the company (usually Nil) to what the interest would have been if the loan had been made using a commercial lender. HMRC uses a standard set of interest rates to determine this.
The employer is obliged, by law, to notify HMRC about this beneficial loan, usually by submitting a Form P11D at the end of the tax year. The director/employees tax code will then be amended so that the individual pays the correct income tax through PAYE.
If the employer fails to notify HMRC of the beneficial loan (or any other benefit for that matter), they can be liable for a penalty of up to £3,000. That is the maximum penalty for failure to submit a P11D or for submitting an incorrect P11D.
Directors' Loans are a minefield.
https://www.farnellclarke.co.uk/what-is-s455-tax#:...
Say you took £50,000 out of your company and decided that it wasn't salary and it wasn't a dividend. It was a loan which you fully intended to pay back (maybe).
Company Law says that you have just made an illegal loan to a connected person and, if it remained in place at the end of the financial year, a note to that effect must be included in the statutory accounts. The note needs to contain full details of the loan, the maximum amount of the loan, the interest rate being charged on the loan and the repayment terms.
If the £50,000 was paid in full within 9 months of the end of the year, then there is no S.455 penalty Corporation Tax due. However, if it is clear that the loan will not be or cannot be repaid within that 9 month period, S.455 tax will be payable.
S.455 is charged at 32.5% of the balance outstanding at the Balance Sheet date. In this case it would amount to £16,250. This MUST be stated in the Corporation Tax Return (there is a special section for it) and the £16,250 needs to be added to the "normal" Corporation Tax liability due and paid to HMRC within 9 months of the financial year end of the company.
If and when the loan is fully repaid, HMRC will refund to the company the S.455 Corporation Tax of £16,250. The company must APPLY separately for this refund and provide documentary evidence (bank statements etc) showing how and when the loan was fully repaid. This is a time consuming and messy process and can take up to 2 years to sort out (ask me how I know this).
Now for the Benefit in Kind (BIK) rules -
First of all, there is no rule regarding 9 months when it comes to the BIK charge.
Once you have taken a loan from your company AND the company does not charge you interest at the market rate, you are getting a "beneficial loan" from your employer and instantly you are liable for an Income Tax charge under the PAYE BIK rules.
The tax is calculated by comparing the interest actually charged by the company (usually Nil) to what the interest would have been if the loan had been made using a commercial lender. HMRC uses a standard set of interest rates to determine this.
The employer is obliged, by law, to notify HMRC about this beneficial loan, usually by submitting a Form P11D at the end of the tax year. The director/employees tax code will then be amended so that the individual pays the correct income tax through PAYE.
If the employer fails to notify HMRC of the beneficial loan (or any other benefit for that matter), they can be liable for a penalty of up to £3,000. That is the maximum penalty for failure to submit a P11D or for submitting an incorrect P11D.
Directors' Loans are a minefield.
https://www.farnellclarke.co.uk/what-is-s455-tax#:...
Also you could run up a high DLA and on the sale of the business claim entrepreneurs relief and pay 10% tax. Unless this is imminent give yourself fairly regular dividends and pay the tax as you go. Be careful as it will impact what you are allowed to put in as pension every year, so you may want to run the DLA up for 3 years with no dividend so you can max your pension contributions and then pay a large dividend every 3 years
speak to your accountant.
speak to your accountant.
Edited by Jonny TVR on Thursday 11th February 10:32
Jonny TVR said:
speak to your accountant.
I do wonder why my (old, he was fired for other mistakes) accountant would let this slide without intervention. Surely it couldn't be ignorance on something so fundamental. So perhaps laziness?
Where does responsibility lie? Let's say I went ahead and lent the money, and told the accountant 'don't worry I'll take the risk'. Are they obliged to object?
Unfortunately for you, primary responsibility for EVERYTHING a company does lies fairly and squarely on the shoulders of the directors.
If you have been following poor advice from professionals, or indeed, getting no advice, on a particular matter then you may have a case against those advisers. But, in law, it's you that HMRC or any other aurthority will come after in the first instance.
If you have been following poor advice from professionals, or indeed, getting no advice, on a particular matter then you may have a case against those advisers. But, in law, it's you that HMRC or any other aurthority will come after in the first instance.
Eric Mc said:
Unfortunately for you, primary responsibility for EVERYTHING a company does lies fairly and squarely on the shoulders of the directors.
If you have been following poor advice from professionals, or indeed, getting no advice, on a particular matter then you may have a case against those advisers. But, in law, it's you that HMRC or any other aurthority will come after in the first instance.
Okay thanks. It was 10 years ago now, but based on this I think its worth my current accountant (who also does my Self assessment) looking at this .If you have been following poor advice from professionals, or indeed, getting no advice, on a particular matter then you may have a case against those advisers. But, in law, it's you that HMRC or any other aurthority will come after in the first instance.
At 2.5% interest, there could be some significant-enough amounts involved.
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