From: barryjcorrigan@gmail.com
Newsgroups: uk.business.accountancy uk.finance
Subject: Re: Tax year balls-up
Date: 11 Apr 2006 17:29:30 -0700
   posting-account=qBMspQwAAAAD1hOva_bwdrAk2WXUC2Dq


Peter Saxton wrote:
> On 11 Apr 2006 14:35:32 -0700, barryjcorrigan@gmail.com wrote:
>
> >Have a slightly difficult situation.
> >
> >Situation is a small Ltd company, probably about =A390k/year revenue,
> >minimal expenses (providing IT contracting services), registered this
> >Jan.
> >
> >The company invoiced for January and February 2006 together, for a
> >total of =A315k+vat, and then for March 2006, another =A310k. The company
> >did not receive cheque payment of the first invoice till April 3rd, and
> >the cheque did not clear till after the start of the 2006-2007 tax
> >year.
> >
> >The result of this was no money in the company until a couple of days
> >ago.
> >
> >Basically the situation now is that I want to make a payment to me and
> >the other shareholder (wife, holding 50% of the shares) of as much as
> >possible in order to use up our tax allowances for 2005-2006. I have
> >=A36k of basic allowance and she has about =A330k basic/lower allowance
> >useable. I am a director, she is not.
> >
> >I have discovered that this might be tricky: dividends it seems are
> >taxed when the money is paid, not when the dividend is actually dated
> >(which could be back dated), so any *payment* now would fall into
> >2006-2007 tax year for the purposes of personal taxation, and with the
> >prospect of =A390k or so in earnings (going into the higher rate band if
> >all the money was paid as a dividen) in the company for 2006-2007, it's
> >obviously advantageous to get out as much as we can using our basic
> >rate allowance.
> >
> >What I would like to do (or to have done already) is to pay three
> >months of salary totalling =A31200 to my wife (equivalent to the Primary
> >Threshold for NI), plus make a =A36000 dividend payment each (tax paid
> >by the corporation tax credit), which would release =A313,200 from the
> >company, with zero personal tax liability.
> >
> >If this money was taken next year as a dividend under higher rate tax,
> >the tax payable would be =A33,300.
> >
> >Unfortunately I have realised any dividends paid now would come in the
> >2006-2007 year, so the liability would be there for 2007.
> >
> >The only suggestion I have is to make a loan note from the company to
> >myself to cover the dividend payment, and back dated to a date in the
> >2006 tax year, say March 31st, and repayable on the basis that the
> >company did not actually have any funds at the time, but would be
> >repaid when funds were received.
> >
> How does this effect your taxable income?

Well, let's say I will receive =A350,000 in the 2006-2007 year, and have
=A330,000 income for 2005-2006. If I make a =A35,000 dividend payment
from the company and it falls into 2005-2006, then there is no
additional tax to pay, I make =A335k in 2005/06, and =A350k in 2006/07.
If the =A35,000 falls in tax year 06/07, then as I believe I will earn
over the basic rate allowance, there will be higher rate tax to pay.

It appears to me that where you own a small company it is in your
interest to make full us of your basic rate allowance every year to pay
out the maximum dividend possible, given that ultimately it's probably
more useful for the money to be in my bank account, or other
investment, that sitting in the company's account.

> >Regarding the PAYE, have I definitely got it right - if a company pays
> >with a slip dated say March 31st but does not actually make the payment
> >till April 6th, that is classed as 2007 income?
> >
> Earliest of entitlement to payment and payment. There's a few more
> complications for directors.

Ok, so I can happily backdate the PAYE.

> >The amounts for the PAYE are fairly small, =A3300 in tax saved, plus the
> >=A3250 payment the Inland Revenue gives for filing online, which I guess
> >I wouldn't get if I didn't make a 2005-2006 PAYE payment.
> >
> =A3150

For the tax year 2005-2006 it says

file online for 2005-06 (return due by 19 May 2006) and get =A3250

http://www.hmrc.gov.uk/employers/onlineguide_smallemp.htm#6

>  >Does anyone have any views on the legitimacy of using a loan note to
> >pay firstly the dividend, and secondly for the 2005-2006 salary
> >payments (I have heard of receiving loan notes for dividends, but never
> >for salary)? How would I draw up such an instrument?
> >
> What do you mean by a loan note? What is the point?

An IOU from the company to myself for the dividend amount, dated within
the 2005-2006 tax year.

The point would be if we were to now declare a dividend of say =A36,000
per share (2 shares), and date it March 31st 2006,  but not pay it
until today, 12 April 2006, then the dividend would fall into tax year
2006-2007, for which I am anticipating earnings above the 40% bracket.

If a loan note/IOU dated March 31st 2006 were acceptable as a form of
payment of the dividend and not viewed badly by IR

> >I am assuming that the Inland Revenue would not view a dividend
> >received on say April 18th or 19th (if I were to pay them now) but
> >dated in 2005-2006 as legitimate.
>
> What do you mean by dated?

The paperwork would all be dated March 31st 2006, but the money would
not be paid until today (or later). The money would not start moving
until 2006-2007 tax year.

> What about NCDR?

My understanding is that where the profit exceeds =A350k there is no
difference in the underlying rate. My company's accounting period is
January 1 - December 31 2006, and the profit will exceed =A350k, so
there is no marginal relief. I guess it would be better if the
accounting period had ended around 31 March, so that =A325k income for
the period would attract marginal relief giving an underlying rate of
14.25%, saving about =A31100 if I didn't pay any dividends, by not
having to pay the 19% rate on NCDs. Unfortunately I can't take
advantage, so it makes sense to pay out the largest dividends I can. I
haven't examined closely but I believe the January 1st - April 5th
period should get a pro rate proprotion of =A350k, now the marginal
relief has been scrapped, which I would exceed.

I'm just worried about personal tax liability here.