I do the bookkeeping for a construction company. There core business is buying land building a house or multiple houses and selling them. They are a ltd company.
The money put into the company to buy the land and fund the build was from a directors personal funds.
When they sell the first houses they plan to reinvest the money in the purchase of more land.
The accountant has told them that even if they spend all of the company profits on buying new Land and building material, they would still need to pay tax on the profits from selling the houses.
This does seems very strange to me. Am I missing something or is the account wrong? Surley if all profits are spent on buying more land and the company makes no profit that year then there will be no tax to pay.
Thanks in advance.
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"... if all profits are spent on buying more land and the company makes no profit ..."
If the company makes no profit then what profits are going to be spent on buying more land?
Profits are not cash.
Cash is not profits.
Buying land for resale does not increase costs and reduce profits, because at year end you need to consider carrying value of stock, remember
Cost of sales:
Add Opening stock
Add Purchases
Less Closing stock
So buying land having everything tied up in land does not mean no profits, it just means liquidity issues as to finding money to pay the tax.
You probably do not need to speak to an accountant to be fair. Any half competent bookkeeper ought to be able to explain this to you.
I've got a better idea. Rather than tying up the cash in land, why not stick it in the directors' pockets? No cash in the company, therefore no profits, therefore no corporation tax. Do I need to register this under DOTAS?
I obviously have not explained myself very well.
Seen as the companies business is building houses to sell on, buying more land to build more houses using the profit from the sale of previous built houses is acceptable. Much as if you owned a sweet shop and sold all your stock, you would then use the money made to buy more stock of sweets.
I am sorry if I have upset some of you and made you feel that you needed to respond in such a way.
Genuine question. Don't worry I won't ask any more.
Even though the sweet shop is using the cash generated from the sale of all its stock of sweets, it must pay tax on the profit generated by selling that stock of sweets. Ask any plumber.
Yes, but you need to value the stock at year end, not all the purchases are tax deductible in the year of purchase, they are in effect recognised in the P & L in year of sale. (or if their value drops below cost, the difference is recognised earlier)
So if company borrows £1,000,000 and over year buys 20 plots for 200,000 each and sell 10 plots for 300,000 each, you have:
Sales 3,000,000 (10x 300,000)
Purchases 4,000,000 (20x200,000)
Less close stock (2,000,000) (10*200,000)
Profit £1,000,000
Which is £100,000 per plot with ten plots sold.
balance sheet
Stock 2,000,000 (10 plots at cost each, £200,000)
Loan (1,000,000)
1,000,000
represented by
Profit £1,000,000
You may have spent all your cash on stock but you still have a profit and tax to pay on that profit.
The accountant is wrong on this. There's no money left - how can it be fair that there's a tax liability?!?!!?
I suggest you tell the company directors that you, the bookkeeper, have identified a major flaw in the work of the overpaid accountant. You could even sit on the resultant meeting with this dumb [***] 'accountant'.............
