Wages and cash flow

[fattony]

I have recently decided to change the way we pay our director, initially it was just a salary (£30k for arguments sake) but we've struggled this last 2 months with cash flow and paying the wage each month puts a strain on us.

So I have suggested we pay £5800 as a salary and to take a dividend every 2 months to top up the salary, the problem I'm not sure about is will hmrc accept this, do I have to tell them or just send a cheque off for the amount we owe?

Thanks

 

[David Griffiths]

No you don't have to tell them, and yes they will accept this. Just make sure that you hold proper meetings to declare the dividends, backed up with management accounts or other figures to support the declaration

 

[telephoneman]

This contradicts the advice that I was given by my accountants. They said that to reduce a directors salary hmrc would expect a good commercial reason, e.g. significantly reduced hours, changed role etc. Paying less tax would not be a good reason nor would cashflow (just brings the company's solvency into question).

 

[David Griffiths]

This contradicts the advice that I was given by my accountants. They said that to reduce a directors salary hmrc would expect a good commercial reason, e.g. significantly reduced hours, changed role etc. Paying less tax would not be a good reason nor would cashflow (just brings the company's solvency into question).

I'd disagree with that advice, and I'm sure that many others will as well. The level of salary is a matter between the director and the company and the Revenue have no say in the matter whatsoever.

 

[cjd]

You can only pay dividends out of reserves of course .........

 

[elaine@cheapaccounting]

This contradicts the advice that I was given by my accountants. They said that to reduce a directors salary hmrc would expect a good commercial reason, e.g. significantly reduced hours, changed role etc. Paying less tax would not be a good reason nor would cashflow (just brings the company's solvency into question).

I'm with David on this one. Some times when the accountant is ex HMRC they seem to have this view. However IMO your accountant should be there to help with tax planning

 

[Williams lester]

I have recently decided to change the way we pay our director, initially it was just a salary (£30k for arguments sake) but we've struggled this last 2 months with cash flow and paying the wage each month puts a strain on us.

So I have suggested we pay £5800 as a salary and to take a dividend every 2 months to top up the salary, the problem I'm not sure about is will hmrc accept this, do I have to tell them or just send a cheque off for the amount we owe?

Thanks

All the above assumes that the director is also a shareholder...as only shareholders receive dividends.

 

[Tom McClelland]

All the above assumes that the director is also a shareholder...as only shareholders receive dividends.

And of course it assumes that there are no other shareholders (unless you don't mind them also receiving pro-rata dividend payments).

But presumably the above riders would be irrelevant to above 99% of family owner-managed limited companies, even when the shareholding is divided between family members.

 

[accountancyextra]

This contradicts the advice that I was given by my accountants. They said that to reduce a directors salary hmrc would expect a good commercial reason, e.g. significantly reduced hours, changed role etc. Paying less tax would not be a good reason nor would cashflow (just brings the company's solvency into question).

I'm with David & Elaine on this one. I'm afraid your accountant has given you poor advice here and you'll be paying more to HMRC than necessary.

As long as the director is also a shareholder and there are no contracts of employment in place, then the low salary/ dividend route is perfectly legitimate (and wise) tax planning.

 

[accountancyextra]

I'm with David on this one. Some times when the accountant is ex HMRC they seem to have this view. However IMO your accountant should be there to help with tax planning

I'm often amazed at how many small businesses still don't use this opportunity and how many accountants don't talk their clients through it and show them the savings that can be had.

Maybe it is because they are ex HMRC accountants or maybe they are just lazy

 

[elaine@cheapaccounting]

Maybe it is because they are ex HMRC accountants or maybe they are just lazy

Who knows but it is sheer madness.

I went on an HMRC course once where they would said that this was not allowed (low salary & divs).

I asked the HMRC person to tell me where the rules ere on this - she couldn't after checking with a colleague. So I politely suggested that she should not mislead people with false information

 

[Jenni384]

I'm with David & Elaine on this one. I'm afraid your accountant has given you poor advice here and you'll be paying more to HMRC than necessary.

As long as the director is also a shareholder and there are no contracts of employment in place, then the low salary/ dividend route is perfectly legitimate (and wise) tax planning.

I'm with David, Elaine and Stuart on this one. It's a legitimate strategy.

Elaine, good for you for trying to stop HMRC spouting rubbish. The amount of bad advice they can give out is terrible.

Accountants should use the existing rules to keep things as tax efficient for our clients as possible.

 

[telephoneman]

People seem to have sidetracked slightly from what I was saying. To clarify, my accountant doesn't have a problem with the low salary + dividends route. The point was that he didn't feel that HMRC would be happy with a director's pay being cut from £30k to £5k for what they saw as tax avoidance.

 

[Williams lester]

People seem to have sidetracked slightly from what I was saying. To clarify, my accountant doesn't have a problem with the low salary + dividends route. The point was that he didn't feel that HMRC would be happy with a director's pay being cut from £30k to £5k for what they saw as tax avoidance.

Who cares what HMRC are happy with. There is nothing illegal in taking a salary and dividend mix.

 

[Jenni384]

he didn't feel that HMRC would be happy with a director's pay being cut from £30k to £5k for what they saw as tax avoidance.

Quite right they wouldn't be happy - but tough luck! It's allowed. As long as it's all done properly there is currently no legislation on which they can rely to dispute the change in position.

Anyway, you've already said the current arrangement is causing you issues, therefore it's a commercial decision to change it, not simply tax avoidance.

Remember, tax avoidance is legal - it's tax evasion that isn't.

 

[accountancyextra]

People seem to have sidetracked slightly from what I was saying. To clarify, my accountant doesn't have a problem with the low salary + dividends route. The point was that he didn't feel that HMRC would be happy with a director's pay being cut from £30k to £5k for what they saw as tax avoidance.

Of course they won't be happy, you'd be paying less tax. However, that isn't a good enough reason to part with more of your hard earned than you legally have to.

 

[accountancyextra]

Quite right they wouldn't be happy - but tough luck! It's allowed. As long as it's all done properly there is currently no legislation on which they can rely to dispute the change in position.

Anyway, you've already said the current arrangement is causing you issues, therefore it's a commercial decision to change it, not simply tax avoidance.

Remember, tax avoidance is legal - it's tax evasion that isn't.

Think we posted at the same time I agree completely Jenni

 

[SteveSJ]

As long as the Director is a share holder and if there are any other Directors they are required to have their share paid out as dividends as well, but you must also remember, dividends can only be paid out of post corporation tax profits.

 

[Tom McClelland]

In the words of the judge who presided over a landmark case.

No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores. The Inland Revenue is not slow-and quite rightly-to take every advantage which is open to it under the taxing statutes for the purpose of depleting the taxpayer's pocket. And the taxpayer is, in like manner, entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue.

 

[elaine@cheapaccounting]

People seem to have sidetracked slightly from what I was saying. To clarify, my accountant doesn't have a problem with the low salary + dividends route. The point was that he didn't feel that HMRC would be happy with a director's pay being cut from £30k to £5k for what they saw as tax avoidance.

Not side tracked at all - you can pay what you like! Nought HMRC can do

 

[elaine@cheapaccounting]

Not side tracked at all - you can pay what you like! Nought HMRC can do

well subject to normal rules of course like operating paye, retained profits being available for divs etc

 

[elaine@cheapaccounting]

As long as the Director is a share holder and if there are any other Directors they are required to have their share paid out as dividends as well, but you must also remember, dividends can only be paid out of post corporation tax profits.

to clarify - shareholders gets divs in proportion of share holding and divs are paid from retained profits

 

[dd456]

My partner and I are preparing to start our own business in the next couple of months. We will be directors of the company and 2 of the 3 shareholders. We are looking at ways of minimising our personal tax burden and cost of employer NI to the company.

A lot of what has been discussed on this topic is very relevent to us. The question I have is that is the dividend + minimum wage combo viable for us as we're forecasting a loss for our first year. Would we still be able to pay ourselves a dividend in our first year? Also if we are able to take a dividend would the third shareholder in the business (who is effectively a silent partner and not taking any wages) 'have' to take a dividend?

 

[Williams lester]

Dividends can only be paid from profit, so, no profit....no dividend.

Dividends are paid to all shareholders (of the same share class), so you would not be able to exclude a 'silent partner'.

You should take advice from your accountant on the best method of profit extraction to suit your personal circumstances.

Also, ensure you get a robust shareholder agreement put in place before you start this business.

 

[accountancyextra]

My partner and I are preparing to start our own business in the next couple of months. We will be directors of the company and 2 of the 3 shareholders. We are looking at ways of minimising our personal tax burden and cost of employer NI to the company.

A lot of what has been discussed on this topic is very relevent to us. The question I have is that is the dividend + minimum wage combo viable for us as we're forecasting a loss for our first year. Would we still be able to pay ourselves a dividend in our first year? Also if we are able to take a dividend would the third shareholder in the business (who is effectively a silent partner and not taking any wages) 'have' to take a dividend?

I would seriously advise taking advice from an accountant before going any further in your case.

If you are intending to make losses in the first year (or maybe 2), there are question marks over whether a limited company is the right vehicle for you in the early years.

Also, if you are making a loss and have to profits available from earlier years, you won't be able to take dividends as they can only be taken from profits.

Honestly, take some proper advice on this one. Even if it costs you a little, you could end up saving a lot in the long run!

 

[elaine@cheapaccounting]

Have a read of this about losses in first year - might help a bit:

http://www.cheapaccounting.co.uk/blog/?p=470

but as siad - get advice on your circs.

 

[dd456]

Thanks all, that's pretty helpful.

We're actually forcasting a monthly loss for the first 8 months and turning a profit from month 9 (averaging a loss overall for the first 12 months though.)

We'll speak to our accountant on the best way.

With regards to accountancy extra's comment on whether a limited company is the best way at the beginning, what other options would we have?

 

[elaine@cheapaccounting]

With regards to accountancy extra's comment on whether a limited company is the best way at the beginning, what other options would we have?

did you read my blog - that explains it

 

[accountancyextra]

With regards to accountancy extra's comment on whether a limited company is the best way at the beginning, what other options would we have?

Maybe consider a partnership or LLP?

 

[dd456]

did you read my blog - that explains it

I did, we can't go sole trader as we're getting financing from the bank on the property that we'll be trading from and we're only getting the amount we need as a ltd company with the above mentioned third partner as a guarentor.

 

[accountancyextra]

I did, we can't go sole trader as we're getting financing from the bank on the property that we'll be trading from and we're only getting the amount we need as a ltd company with the above mentioned third partner as a guarentor.

Not quite sure I follow you here.

Are you saying that you are buying a property through the ltd or that you are releasing equity in the property.

Surprised a bank will only lend to you trading as a ltd, I'm assuming that no3 has PG'd the loan?

 

[dd456]

Not quite sure I follow you here.

Are you saying that you are buying a property through the ltd or that you are releasing equity in the property.

Surprised a bank will only lend to you trading as a ltd, I'm assuming that no3 has PG'd the loan?

Yeah we're buying the property through the limited company , the third partner is also an already existing ltd company therefore I presume we can't go LLP

Essentially the set up is this:

we're buying assets from an existing company, the assets are a freehold property, stock, fixtures and fittings. We're only buying these assets, not the current business as a whole so we'll be a completely new and separate entity

my partner and I are putting in money, the third partner is putting in money from their holding company and the bank is providing a mortgage on the property. (they would not lend any money against the exisiting stock)

The bank asked us to form a company to which they'll loan the money for the property.

And correct, the thrid partner has personally guarenteed the loan

 

[elaine@cheapaccounting]

I did, we can't go sole trader as we're getting financing from the bank on the property that we'll be trading from and we're only getting the amount we need as a ltd company with the above mentioned third partner as a guarentor.

Ok so that is the only option then

 

[accountancyextra]

Yeah we're buying the property through the limited company , the third partner is also an already existing ltd company therefore I presume we can't go LLP

Essentially the set up is this:

we're buying assets from an existing company, the assets are a freehold property, stock, fixtures and fittings. We're only buying these assets, not the current business as a whole so we'll be a completely new and separate entity

my partner and I are putting in money, the third partner is putting in money from their holding company and the bank is providing a mortgage on the property. (they would not lend any money against the exisiting stock)

The bank asked us to form a company to which they'll loan the money for the property.

And correct, the thrid partner has personally guarenteed the loan

Ok, the advice you need for this goes well beyond that which could be given on a forum such as this.

One thing I would say is to seek proper advice from a tax specialist - there looks to be allsorts of potential issues and pitfalls here, not least double taxation issues, if you decide to sell the property.

Not sure why the bank is insisting on ltd status either.

 

[dd456]

crikey what are the other potential pitfalls...?

 

[accountancyextra]

crikey what are the other potential pitfalls...?

Probably going to miss some, but here goes:

1. Loss relief
2. Remuneration strategy & in particular employers NI
3. Double taxation on property ( a major issue!)
4. Shareholdings/ clasification of shares, especially for no3
5. Is the purchase at arms length
6. Shareholder agreements

 

[dd456]

Probably going to miss some, but here goes:

1. Loss relief
2. Remuneration strategy & in particular employers NI
3. Double taxation on property ( a major issue!)
4. Shareholdings/ clasification of shares, especially for no3
5. Is the purchase at arms length
6. Shareholder agreements

Having just googled these and not fully getting my head round it all, I'll be sure to bring this up with the other parties and the accountant. Many thanks for the heads up.