Retained profit
Discussion
As I understand it, once we have paid our CT on profit any retained profit can be banked and then taken as share dividend in future years, even if profits in future years are less than the dividend? Are there any time limits on this?
What about investing the retained profits? Does any earned income from interest or capital gains count on retained profots then count as new profit to be taxed or retained profits which can be taken without paying tax? As those words slipped from my fingers I think I know the answer! I bet Mr Darling whats his 21/22%? I presume the tax is payable on bank interest annually, but what about gains on managed funds which will not be ealised until the funds are sold?
What about investing the retained profits? Does any earned income from interest or capital gains count on retained profots then count as new profit to be taxed or retained profits which can be taken without paying tax? As those words slipped from my fingers I think I know the answer! I bet Mr Darling whats his 21/22%? I presume the tax is payable on bank interest annually, but what about gains on managed funds which will not be ealised until the funds are sold?
Don't confuse "profits" with "surplus cash".
There are fundamental differences between the two.
Regarding retained or accumulated profits, it is perfectly legal to withdraw dividends from the "Retained Profit" pot in future years.
You can only re-invest accumulated profits if they exist in such a form that they can be readily converted from whatever form they currently exist in the business already.
Some will be in the form of surplus "Cash at Bank".
Some may be tied up in unreceived sales - i.e. Trade Debtors
Some may be tied up in "Stcck in Hand" i.e unsold goods.
The only element that can easily be re-invested would be "Cash in Hand".
Even "Cash in Hand" could be looked on as "Invested Profits" (in a limited way) and such Cash in Hand could already be generating extra profits in the form of Interest Received. This interest is taxed under the normal Corporation Tax rules for companies.
If the cash was re-invested in some other form of investment vehicle, any additional income generated from the investment (such as deposit interest if a savings account or dividends if shares in another company) would be taxed under Corporation Tax rules.
If such investments grow in value over time, when and if they are subsequently disposed of they will be subject to Capital Gains Tax based on the gain achieved. As you no doubt know, the whole CGT scene is changing dramatically on 1 April (for limited companies).
Up until now, companies paid CGT at their top Corporation Tax rate. From 1 April 2008 the rate will be fixed at 18% for non-business type assets. I have not seen how the special 10% "Business Asset Capital Gains Tax Rate" works in respect of limited companies.
There are fundamental differences between the two.
Regarding retained or accumulated profits, it is perfectly legal to withdraw dividends from the "Retained Profit" pot in future years.
You can only re-invest accumulated profits if they exist in such a form that they can be readily converted from whatever form they currently exist in the business already.
Some will be in the form of surplus "Cash at Bank".
Some may be tied up in unreceived sales - i.e. Trade Debtors
Some may be tied up in "Stcck in Hand" i.e unsold goods.
The only element that can easily be re-invested would be "Cash in Hand".
Even "Cash in Hand" could be looked on as "Invested Profits" (in a limited way) and such Cash in Hand could already be generating extra profits in the form of Interest Received. This interest is taxed under the normal Corporation Tax rules for companies.
If the cash was re-invested in some other form of investment vehicle, any additional income generated from the investment (such as deposit interest if a savings account or dividends if shares in another company) would be taxed under Corporation Tax rules.
If such investments grow in value over time, when and if they are subsequently disposed of they will be subject to Capital Gains Tax based on the gain achieved. As you no doubt know, the whole CGT scene is changing dramatically on 1 April (for limited companies).
Up until now, companies paid CGT at their top Corporation Tax rate. From 1 April 2008 the rate will be fixed at 18% for non-business type assets. I have not seen how the special 10% "Business Asset Capital Gains Tax Rate" works in respect of limited companies.
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