Retained profits

[Newchodge]

Dividends should only be taken from retained profits, as we all know!

I realise this is a pretty basic quesion but here goes. Are retained profits calculated on a cumulative basis from the company's inception?

So, for example,
Year 1 £5,000 loss
Year 2 £1,000 loss £6,000 cumulative loss
Year 3 £4,000 profit £2,000 cumulative loss
Year 4 £10,000 profit £8,000 cumulative profit

I believe
CT Year 4 on £8,000 @ 19% so CT of £1,520, so profit of £6,480
Dividends may be issued on £6,480.

Is that right?

 

[MyTonyAcc]

100% correct (IMO)

 

[cjd]

Yup, except that if you pay all the dividends available you have nothing in the coffers for that inevitable rainy day.

 

[Newchodge]

Yup, except that if you pay all the dividends available you have nothing in the coffers for that inevitable rainy day.

Thanks, it was more the accumulation element I was worried about.

 

[Clinton]

As above, the only caveat of course being that the profits need to be realised profits or the div declaration becomes illegal.

 

[Newchodge]

As above, the only caveat of course being that the profits need to be realised profits or the div declaration becomes illegal.

realised being defined as?

 

[Clinton]

Profits actually made and booked. So an appreciation in an asset value isn't realised profit till that asset is sold.

This is to prevent upward revisions of stock value in the balance sheet, for example, to fund div payments

The relevant legislation is S.830 of The Companies Act.

 

[Newchodge]

Profits actually made and booked. So an appreciation in an asset value isn't realised profit till that asset is sold.

This is to prevent upward revisions of stock value in the balance sheet, for example, to fund div payments

The relevant legislation is S.830 of The Companies Act.

Thanks

 

[Clinton]

All kinds of funny things happen in this game. Last week saw the tax tribunal decision in the case of Jones vs HMRC.

Mr & Mrs Jones traditionally paid themselves, from their Ltd company, the min £10K or so in salary and took +£100K each in dividends. In their last year of trading, they did this but the company went insolvent and administrators wanted them to repay the last dividends (as those dividends were unlawful).

The Joneses then retrospectively changed the "dividends" to "salary" in the accounts, months later, to avoid having to return those monies to the company for the administrator to distribute it to creditors.

But, of course, this change meant that they would now have to shell out for PAYE and NI which they hadn't paid at the time of withdrawing the monies.

So HMRC took them to a tribunal.

HMRC lost this one as it was ruled at tribunal that at the time of the withdrawals the intention was dividend, not salary. Great.

Except that ...what happens now? The administrator comes after them for the full value of the dividends withdrawn in the last year? Possibly. Let's see how it pans out.

 

[Newchodge]

All kinds of funny things happen in this game. Last week saw the tax tribunal decision in the case of Jones vs HMRC.

Mr & Mrs Jones traditionally paid themselves, from their Ltd company, the min £10K or so in salary and took +£100K each in dividends. In their last year of trading, they did this but the company went insolvent and administrators wanted them to repay the last dividends (as those dividends were unlawful).

The Joneses then retrospectively changed the "dividends" to "salary" in the accounts, months later, to avoid having to return those monies to the company for the administrator to distribute it to creditors.

But, of course, this change meant that they would now have to shell out for PAYE and NI which they hadn't paid at the time of withdrawing the monies.

So HMRC took them to a tribunal.

HMRC lost this one as it was ruled at tribunal that at the time of the withdrawals the intention was dividend, not salary. Great.

Except that ...what happens now? The administrator comes after them for the full value of the dividends withdrawn in the last year? Possibly. Let's see how it pans out.

I thought re-writing history was unacceptable. Unless there is RTI evidence of payroll, it hasn't happened?

 

[Clinton]

The years in question date from just before RTI came into play.

 

[UK Contractor Accountant]

All kinds of funny things happen in this game. Last week saw the tax tribunal decision in the case of Jones vs HMRC.

this was a 2014 case?

 

[UK Contractor Accountant]

I thought re-writing history was unacceptable. Unless there is RTI evidence of payroll, it hasn't happened?

this was what the case was all about - they couldn't change the nature of the payment from interim dividends to salary to avoid liquidator problems of asking for them to be repaid.

 

[Newchodge]

All kinds of funny things happen in this game. Last week saw the tax tribunal decision in the case of Jones vs HMRC.

Mr & Mrs Jones traditionally paid themselves, from their Ltd company, the min £10K or so in salary and took +£100K each in dividends. In their last year of trading, they did this but the company went insolvent and administrators wanted them to repay the last dividends (as those dividends were unlawful).

The Joneses then retrospectively changed the "dividends" to "salary" in the accounts, months later, to avoid having to return those monies to the company for the administrator to distribute it to creditors.

But, of course, this change meant that they would now have to shell out for PAYE and NI which they hadn't paid at the time of withdrawing the monies.

So HMRC took them to a tribunal.

HMRC lost this one as it was ruled at tribunal that at the time of the withdrawals the intention was dividend, not salary. Great.

Except that ...what happens now? The administrator comes after them for the full value of the dividends withdrawn in the last year? Possibly. Let's see how it pans out.

That sounds like a win to me - the administrator goes after them for the money they owe.

 

[Clinton]

this was a 2014 case?

2014 is the date the case got to court and is not related to the disputed year (which year/s predated RTI, as I explained before).

That sounds like a win to me - the administrator goes after them for the money they owe.

Unfortunately, the long time gap - a decade and a half - gets in the way a bit. In any case, not a win for HMRC (unless they were major creditors at liquidation)!

 

[Newchodge]

2014 is the date of the case and not the years in question (which years predated RTI, as I explained before).



Unfortunately, the long time gap - a decade and a half - gets in the way a bit.

Presumably, though, there is now the precedent so changing illegal dividends to payroll will be rejected immediately, instead of 11 years later.

 

[Ziggy2024]

Presumably, though, there is now the precedent so changing illegal dividends to payroll will be rejected immediately, instead of 11 years later.

This is a really old case, I didn't know it was still ongoing. Strange in that HMRC was actually not being arbitrary here for a change!

There is no precedent established in this case. These were always the rules.

 

[Daybooks]

Back to your original question the answer would technically be no. The reason being that your corporation tax is payable on your taxable profit not your accounting profit.

The usual differences are disallowable expenses for tax purposes and capital allowances replacing depreciation.

At the end of each accounting period you’ll generally deduct any corporation tax payable from your accounting profit (retained pre dividend) and separately record and carry forward the taxable losses. Please check and make sure you use those figures as appropriate for each year.

It might seem a pedantic point but an important one. If your accounting profits were the same as your taxable profit then you may be missing out on some tax saving opportunities.

In addition to @Clinton’s comment there is a presumption that the losses relate to the same trade otherwise there may be other considerations.

 

[Newchodge]

Back to your original question the answer would technically be no. The reason being that your corporation tax is payable on your taxable profit not your accounting profit.

The usual differences are disallowable expenses for tax purposes and capital allowances replacing depreciation.

At the end of each accounting period you’ll generally deduct any corporation tax payable from your accounting profit (retained pre dividend) and separately record and carry forward the taxable losses. Please check and make sure you use those figures as appropriate for each year.

It might seem a pedantic point but an important one. If your accounting profits were the same as your taxable profit then you may be missing out on some tax saving opportunities.

In addition to @Clinton’s comment there is a presumption that the losses relate to the same trade otherwise there may be other considerations.

It is not for my accounts. Another poster mentioned they had received dividends for the first half of the year, when the company was in profit and when it went into administration later the same year, the liquidator claimed the dividends were illegal. It just got me thinking.