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B/fwd company losses & divi'

Any thoughts appreciated;

I have a client a small company. The company has b/fwd losses circa 50K no reserves. The two directors take a salary circa £25k each, obviously this would be better as dividends. Yet as they are constantly breaking even then divi’ would be illegal. Any thoughts on how best to restructure this? W/off?

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04th Feb 2013 13:43

Write off what?

You cannot write off the brought forward losses.

They have got themselves into a vicious circle and there is no easy solution.  They can only resolve it by making more trading profit or taking less salary until they have worked off the b/f losses and then, they can play around with salaries of £7,000ish and taking the rest of the profits as dividends.

 

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By paulb
04th Feb 2013 14:01

Eaun,

Thank you for the reply. By "W/OFF" I'm thinking w/off the company and start again (new company.) Very little chance of making profits over next 5 years so saving would be significant!

 

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04th Feb 2013 14:23

Please explain

Very little chance of making profits over next 5 years so saving would be significant!

What savings?

Surely getting the company profitable is better than 'rinsing & repeating' a loss making company. Also, the £50k losses are available to offset future profits, so how will they save anything? Do they have overdrawn DLA's?

EDIT: just twigged. You meant savings on PAYE/NI. Are there any creditors, other than the directors?

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By paulb
04th Feb 2013 14:47

Standard trade creditors that with good timing could be cleared - not dumping anyone in it...Simply as you say saving on the PAYE/NI. The business is making a profit hence the salary i.e. bottom line circa £50k a year however they cannot afford to sacrifice salary. Other factors they rent and have 5 years left on agreement. Just trying to think outside the box good honest people deserve a little help for all the hours put in.

 

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04th Feb 2013 15:36

Who is owed the £50K?

If it is the directors, then the obvious solution is for the company to repay their loan to the company, instead of giving £25K remuneration each. The resulting profits would be covered by the losses brought forward, and then they can go onto the traditional low remuneration plus dividends the following year.

If the £50K is owed to trade creditors and they can't pay them, they will have to engage an Insolvency Practitioner to close the company anyway.

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By paulb
04th Feb 2013 15:46

Sorry, they do not have 50K creditors they do have a small loan however something could be done with this ie pay it off or re-finance in new company using DLA. Can't run two companies with transfer of trade as "linked by associatio.n" I think Im just stabbing in the dark - one of those days. I will sit down and have a think about what could be done. Thank you. 

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Shirley's point...

... is that if they've run up £50K of accounting losses, then the balance sheet must have been depleted by £50K, so unless they started with assets of more than £50K they would now be insolvent on paper, and the deficit would b represented by creditors.

If you valued goodwill today and distributed the net assets at their fair values, would the amount being distributed exceed £25K?

At this level, you need to consider whether operating through a limited company is right for them.

What you could do in 2013/14 is disincorporate, claim disincorporation relief, and get the asset distribution treated as a capital gain, qualifying for entrepreurs' relief.

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By paulb
04th Feb 2013 17:50

George,

Thank you very much for the reply. I work on my own so appreciate the bounce.

Turnover circa £400k 

Balance Sheet

Fixed Assets 26K

Debtors         78K

Creditors    

<1 Year         85K (50K Trade,20KVAT,PAYE,10KO/D)

>1 Year         35K Loan

Other            20K (Family Loan)

Sharholders funds  (45K)

4 Directors Husband Wife's

Fixed assets under valued if sold now would be more like £45K

I took this company on last year from another accountant.

 Again thanks for your thoughts...

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I agree with Shirley and Euan

If you transfer the trade to another company, and they keep doing the same thing, they'll just end up in the same place (and the existing trade losses will be gone should they ever turn it around).  They need to try some or all of:

Increasing profits by increasing turnover, which I suspect is the problem, in that they've been unable to do that.Increase profits by reducing costs.  Have they got any staff they can get rid o?f and can they reduce what they're taking out the business?Change the way they're taking money out of the company, so that they pay less NI; mileage, mobile phones, childcare vouchers, home office rental, etc.

The benefit of operating through a limited company, is that you can extract profits through the basic rate band with a total tax rate of 20% (no Class 2/Class 4 NIC).

If they can't operate their business so that they can achieve that, then there's no point being incorporated.

The new proposed disincorporation relief, combined with the statutory version of ESC C16 and entrepreneur's relief, does give quite a viable route to disincorporation (to an LLP, so that limited liability is retained).

Then maybe they can get the business in shape, and reincorporate, if appropriate, later on.  Obviously, they still lose the trade losses, but if they stay at the same level of profitability/drawing, they should be better off.

Knock up some numbers, to make the comparisons, and then you can sit them down and talk to them.  They're headed for failure if they keep doing what they're doing now.

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05th Feb 2013 12:12

directors loans??

Latecomer to thread and just posting a "quickie" so apologise if I have not read all.

If salaries etc were stopped, and monies drawn were loans to the directors, you could use (by using the small profits) the losses brought forward and yes then sit with a loan/loans that would attract s455 charges.

If they are paying £25k salaries, the "wasted" ee's  and Er's NIC contributions alone are costing them thousands of pounds each year.....

However as long as post YE profits (in the 9 months following YE) were sufficient, a divi could be voted 9 months after the YE to clear the balance at the year end so no s455. Yes it is an ongoing circle until they build up reserves but could be used/worked on??

(I raised a question on the overdrawn loan accounts a month ago that may assist) I know I have drifted slightly off centre with my relpy but just a thought ........

 

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