Declaring dividends in a loss making company

Declaring dividends in a loss making company

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Suppose a young company is loss-making in its first year.

Can the company declare a dividend anyway, by debiting dividends and crediting the director loan account?

This would use up the basic rate band in earlier years.

The director can draw against the loan later on tax free (when the company is profitable).

What are the pitfalls of doing this?

Thanks.

Replies (15)

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By elvisisking
20th Jan 2016 09:05

The main pitfall is....

The main pitfall is that dividends have to be declared out of the profit of the business, if there aren't any how can dividends be declared?

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By SteveHa
20th Jan 2016 09:11

You are talking about declaring illegal dividends, which is a no no. What if the company never becomes profitable and a liquidator is appointed. The director would find himself with a debt to pay.

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Replying to Jbnewbie:
RLI
By lionofludesch
20th Jan 2016 09:14

Maybe not

SteLacca wrote:

You are talking about declaring illegal dividends, which is a no no. What if the company never becomes profitable and a liquidator is appointed. The director would find himself with a debt to pay.

Maybe not, if he doesn't actually draw them.

Not recommended but these things are so poorly policed that this risky policy may work.

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By cheekychappy
20th Jan 2016 09:24

Don’t do it.

You know it’s wrong. If you comply with this, the client will expect more rule “bending” to come.

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By Nacca91
20th Jan 2016 09:29

Not advised

It might be risky and go unchecked so you could get away with it but as cheekychappy says, this will be the start of a slippery slope with this client that will expect every tax break, legal or otherwise, just because his mate said he can do it. 

Nip it in the bud early - when the company makes a profit then he can draw his dividends but until then, he's paying for your professional tax advice be firm!

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By thomas
20th Jan 2016 10:52

NO - you cant pay a dividend when there are no profits

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By johngroganjga
20th Jan 2016 10:58

I don't want to get involved in semantics, but you can pay a dividend when there are no profits to distribute (it's quite easy actually - look at the number of posts there are on AWeb asking after the event about the consequences of having done so).

The point is you shouldn't

It's one thing to do so inadvertently, which is what most of the posts on AWeb relate to, but quite another to do so deliberately and knowingly, especially if you are an accountant advising clients.

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By User deleted
20th Jan 2016 11:52

Show ....

... an overdrawn DLA, if the predicted profits appear you can vote a dividend within nine months of year end to clear and avoid paying s455 tax

 

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Replying to Vallery Lee:
By johngroganjga
20th Jan 2016 12:27

Mis-read

Old Greying Accountant wrote:

... an overdrawn DLA, if the predicted profits appear you can vote a dividend within nine months of year end to clear and avoid paying s455 tax

I think you have misread. The question is not about a client who wants to take cash out of the company. It is about a client who wants to create taxable income to use up his basic rate band. 

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Replying to paul.benny:
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By User deleted
20th Jan 2016 13:14

Which is why ...

johngroganjga wrote:

Old Greying Accountant wrote:

... an overdrawn DLA, if the predicted profits appear you can vote a dividend within nine months of year end to clear and avoid paying s455 tax

I think you have misread. The question is not about a client who wants to take cash out of the company. It is about a client who wants to create taxable income to use up his basic rate band. 

... 31st March is such a useful year end!

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By Fred Flintstone
20th Jan 2016 12:08

Hmmm, inadvertently

Yes I've heard of someone who inadvertently used to:

prepare the company accounts first before back dating dividends so as to use up every pound of basic rate each yearincrease or decrease estimates of wip based on startling new assumptions which suddenly appeared after preparing the accounts and seeing the profitincrease or decrease estimates of stock based on startling new assumptions which suddenly appeared after preparing the accounts and seeing the profit"rethink" prepayments and accruals based on startling new assumptions which suddenly appeared after preparing the accounts and seeing the profit

But interestingly he never used to declare illegal dividends - perhaps the going concern issue was a step too far...

Sorry I'm just a student, but I've passed my cynical paper already :)

Fred

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By Ruddles
20th Jan 2016 12:47

If he wants to use up basic rate band

Take a loan and write it off within 9 months of APE. No s455 and deemed taxable dividend.

Points to watch:

HMRC may argue that NI is chargeable (I'd tell them to get lost)

If company goes bust, liquidator may try to retrieve the monies from director (but no different from paying an illegal dividend).

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By Matrix
20th Jan 2016 13:28

Surely the tax angle is that dividends are paid out of distributable post-tax profits and currently come with a tax credit - dividends paid out of a loss-making company have not suffered any tax?

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Replying to Wanderer:
RLI
By lionofludesch
20th Jan 2016 15:39

ACT

Matrix wrote:

Surely the tax angle is that dividends are paid out of distributable post-tax profits and currently come with a tax credit - dividends paid out of a loss-making company have not suffered any tax?

That didn't happen with ACT.  Indeed - that was its rationâle.

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By ireallyshouldknowthisbut
20th Jan 2016 14:31

.

Have you considered PAYE for the director(s)?

 

 

 

 

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