I'm embarrassed to ask this, since I have a feeling the answer is obvious - blame the heat for clouding my brain.
I'm doing the abbreviated company accounts for our very small limited company. As I have lamented elsewhere on the forum, this year the profits were low and after the company has paid the hard-working company secretary (me) a small salary they will be zero.
But this time a year ago (almost to the day, so in this company year) we made a payment to HMRC a small amount of corporation tax relating to the previous year. On Sage it was Dr Corporation Tax, Cr Bank.
So our net current assets are negative, by the amount of the tax.
We have no fixed assets.
That makes net assets for the company negative.
Is that allowed?
Or is this all an artificial creation of the fact that on Sage we have the "Corporation tax" account set at 3290, i.e. in among the capital nominal codes. But that's right, because tax itself can't be an expense to be offset against tax...
Head going round in circles! Any advice gratefully received.
If you are a limited company you need to make a provision for the tax liability in the year
Dr P&L account
Cr Balance Sheet (CT prov)
The debit to the P&L account isnt an expense but is after the net profit being a provision for tax against the net profit. The tax provision will of course reduce the profit that is rolled into the P&L reserve in the following year.
Next year when you pay the tax on the provision that you made you clear out the liability on the balance sheet by the following journal
Dr Balance Sheet (CT prov)
Cr Bank
You of course would also provide for that years CT liability at the year end.
There is nothing illegal about showing negative assets. What it means is that you liabilities are greater than your assets so effectively you are technically insolvent. What you cant do is pay out dividends which leave a negative P&L reserve (but you can pay a salary which is just a cost like anything else).
I am assuming that the payment you made a year ago for CT wasnt tax for that year but the year before. There should have been a liability in the balance sheet to match against it. If not then at some point you have understated your CT liability in your accounts and it sorted by just charging to the P&L reserve when you make the payment (this is what results in the negative assets for you).
Yes, you are correct, the payment of CT was for the company year before the year in which we made the payment.
"There is nothing illegal about showing negative assets. What it means is that you liabilities are greater than your assets so effectively you are technically insolvent. What you cant do is pay out dividends which leave a negative P&L reserve (but you can pay a salary which is just a cost like anything else)." - Thanks in particular for this; the point that you *can't* pay a dividend that leaves your liabilities greater than your assets was already known to me, but I had not previously got the point (assuming I've understood correctly) that you *can* pay a salary that does this.
(Let me stress that the excess is small. We are not really insolvent.)
It feels a bit odd, when we ourselves (my husband and I) have set the salary at exactly the size such that taxable profit is zero!
Yes you have understood correct that you can pay a salary and show negative reserves.
Whenever the balance sheet is negative the company is technically insolvent (ie liabilities greater than assets) and this should be emphasised by inserting a going concern note under accounting policies in the stat accounts.
