Corporation tax - tell me I'm wrong

trailingspouse

A bit of background - OH and I run a limited company. I run the finance side of it. Our year end is February, so our Corporation Tax is due at the beginning of December.

Every time I pay a dividend, I put the tax in a separate 'Corporation Tax' account. Yes, I am that sensible.

So, let's say our CT bill is £20,000 a year, by the end of Feb I have £20,000 in my CT account from the dividends of the previous year, that I know is going to be paid as tax (because dividends are de facto profit), but when the sums are done, that £20,000 is included in the profit figure for the business, and our tax bill is increased by a further £4,000 (yes I know CT tax is 19% now - I can't be bothered to do the math). Which is irritating.

Is there anything to stop me paying my CT tax before it's due (or even been calculated), and thus saving £4,000?

Dazed_and_confused

Do you have an accountant?

uknick

Your corporation tax bill is £20k per year, so you've got taxable profits of over £100k per year? What does your accountant say?

But, assuming you don't have one to ask, your taxable profits are calculated as at the end of February. The taxable profits will include any dividends you've paid from that year's profits. Historical dividends, i.e. those paid from previous years profits, aren't relevant so, it doesn't matter when you pay the CT for a certain tax year it'll always be the same figure due.

Or, am I missing some subtle nuance from your question?

TheCyclingProgrammer

I’m also struggling a bit with the question. I’m not sure why you’re using the payment of dividends as a trigger to set aside some corporation tax. Are you remembering to account for the fact that dividends are taken from post tax profits?

There shouldn’t really be any need to “set aside” money for your CT bill. If you’re using decent bookkeeping software and keeping track of your sales and expenses then at any given point you know your turnover, gross profits, estimated corporation tax liability, net profits after tax plus any retained profits from previous years and consequently how much you could legally take as a dividend.

00ec25

yes you are wrong, the £4,000 is the profits you forgot are part of your taxable profit since dividends do not equate to taxable profits, they equate to post tax profits less retained reserves.

yes you can pay CT as soon as you want. It will be treated as a payment on account until the actual tax return is submitted (and the due date arrives). Any POA will receive interest payable by HMRC (although if a small amount HMRC will simply take it back as a "permanent overpayment" rather than actually pay it out to you)

I think your discipline of setting aside money to cover the CT is admirable, we have lots of clients who look at their profits figure and take it all out as dividends then squeal that they don't have the cash to pay the tax on the due date because they have spent it.

trailingspouse wrote: »

(because dividends are de facto profit),

hmmmm.... as others have said, your maths is off because you misunderstand what is going on. Dividends + 1.23 added back (the dividend is net of 19% CT so represents 81 of 100) + retained profits earned in that year (ignoring b/fwd retained profits) = taxable profit for that year. CT will be 19% of that amount.
I agree that using 20% as the set aside provides some safety margin, but equally without the exact figures it could just as easily need 21% set aside...

Do you really not have an accountant for a 100k turnover business?

depending on the nature of your business you may want to consider using accounting software that provides a live estimate of your CT liability as well as tracking dividends paid from your profits. FreeAgent does such, but is only really suitable for certain types of business IMHO.

polymaff

I think I see where you are coming from. You equate dividends with profit i.e. you intend that every £ of profit comes out as a dividend.

Trouble is, for that to be so you need to understand that dividends are taken from the profit after tax - and that is why your interpretation leaves you owing "extra" tax.

As for paying CT in advance - that won't eliminate the £4k liability. That is tax you owe - period.

trailingspouse

OK, thanks everyone. It was the pre-tax bit that was missing in my thinking. I get it now.

And yes, we do indeed use the services of an accountant - would far rather look like an idiot in front of you lot than in real life though...
The only really stupid questions are the ones you don't ask.

00ec25

trailingspouse wrote: »

And yes, we do indeed use the services of an accountant - would far rather look like an idiot in front of you lot than in real life though...

then change accountants, because this topic is the single most important thing that any accountant should explain to their small company clients and really should not need asking about afterwards.

It should have been covered up front by them when they took you on... if for no other reason than it saves time later on unpicking the figures you may have inadvertently have caused?