Just taken on a new client (hurray!). He was self employed, but has just become Ltd, and is setting up bank accounts, informing Comp House / HMRC etc.
He will be taking £600 per month as a salary, and an additional amount in 'dividends'.
He wants me to give him monthly management accounts of his business (not a problem,) but also wants me to calculate each month what his provision should be for Corp Tax, how much he is allowed to take as a dividend and how much he should hold for any Self Asses he may have to pay. (He has no other income)
I am used to doing accounts to TB, but not doing tax calc's, so am getting in a bit of a muddle on the rules. I understand about the £600 salary being under the Tax/NI threshold, however, does he pay 20% Corp tax on the Ltd company profit, and then tax on any dividends he takes under his Self Assess declaration? He's a consultant, and is used to a pay of about £5k per month. He'll have few overheads, and looking at what he charges, he'll have a certain profit at the year end.
I just need some clarity on what the thresholds are for Corp Tax and taking dividends as a director...
is he caught under IR35 legislation as a personal service company?
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I don't mean to be a pain, but from your profile I can't tell if you are a bookkeeper or an accountant. If your client is asking you for advice or calculation of taxes then make sure that your qualification or any licence you hold with any official body allows you to give tax advice (and your PII covers it). It may seem a very innocent request from your client, but it may land you in very hot waters in case of disputes later on (e.g. your client is not happy with your tax advice).
Having said the above I'm very interested in this scenario as I have always believed that IR35 was a matter of fact and not something that you can dodge by wording a contract for supply of services in a crafty solicitor-ish way. However I know the possibilities are endless and nothing surprises me any more...
Fabs
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I suspect that there will be tears before bedtime if HMRC come around to visit as there are numerous IT contractors out there sold air tight contracts only to find that they were basically not worth the paper that they were written on.
Normally I would be adverse the answering something like this on the site as it's accounting rather than bookkeeping territory but you have already stated that an accountant is involved so my assumption is that you are simply recording the data rather than actually giving your client advice on this matter.
One wonders why an accountant and a bookkeeper would need to be involved in what will be a quite simple set of books. But I'm sure that there are reasons.
Answering only the direct question posed for your general understanding rather than this being in any way advice as to the approach that your client should take.
Dividends can be taken against any profit of the company so deduct all expenses (including your fees, Companies house annual fee, etc.) and the £7,200 salary.
The dividend paid by a company includes a 10% tax credit so the director will receive 90% of the dividend and 10% goes to HMRC directly via corporation tax.
The dividend itself is the bottom rung of the calculation so basically you would calculate the Profit Chargeable to corporation tax. Calculate the tax payable, and then the money that is left over is available as a dividend.
The £5000 paid in the dividend will be grossed up (/90*10) meaning that the director received the full £5000 plus tax credit of £555.56.
The director would declare a gross dividend of £5555.56 on their tax return and show a tax credit of £555.56.
Anyway, my feeling is that this will end badly so make sure that you get in writing that you are not in any way giving your client advice, that you have informed your client of IR35 and that they have been informed by their accountant to adopt this approach which you are simply recording.
HTH,
Shaun.
NOTE : Correction (shown in blue) applied to my original post after Mark pointed out my silly mistake from last night. (Thanks Mark).
-- Edited by Shamus on Sunday 15th of January 2012 10:07:41 AM
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
this is what happens when I pop off for supper (and an episode of big bang theory) in the middle of a reply.
Sounds as though we both have reservations about the effect of IR35 on this scenario.
talk soon,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
The £5000 will include a tax credit of £500 so the amount paid to the director is £4,500.
Hi Shaun
Dont think you are right.
The amount shown through the accounts re dividends is after the 10% notional tax deduction.
Therefore in your example above £5k is 90% of the gross dividend (which the director will be paid). The tax credit would be £555.56 (£5k/9) and the gross dividend £5,555.56 which is what the director would declare on their tax return. The 10% tax credit is a notional tax credit which isnt actually physically paid
Unless there has been a major changing in accounting treatment since i was last in practice in June which i dont know about.
your right of course. Whilst the rest of the calculation is correct the tax credit should have been £555.55 and the grossed up Dividend in the tax calculation should have been £5,555.56.
What planet was I on when I wrote that line!
Anyway, the last line of my post was completely wrong. The rest of it was correct.
Many thanks for pointing my error out I'll just pop back and correct it.
kind regards,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I agree with MarkS about the dividend and dividend tax credit.
Also you mentioned the client's self assessment. He will only have tax to pay personally if his total income takes him into the higher rate tax band, which sounds likely. It's all explained here:
Hi. Many thanks for all your quick replies.
In respnse to the IR35 issue. - I too was concerned when we first spoke on the phone, but having now met him and agreed, (in writing) that I'm not giving tax or IR 35 advice I feel a lot better about it. He seems to understand IR35, but feels he lies in that percentage of contractors in the grey area of partly in and partly out. Thats why he wants to make sure he leaves enough cash in his business to cover Corp tax, his tax based on outside IR 35 & potentially a balance to keep by incase he is ever deemed inside IR35. He agreed his accounts as such will be pretty easy to prepare, it more a regular cashflow forecast he's after.
Anyway, I will let you know if theres any developements on this...
Thanks again.
