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Limited company dividend and tax


Hello,
This is a bit of a mess so thanks in advance for taking the time to read and any help.
I'm asking this on behalf of my dad. He recently dissolved a company (June 2021) which had ~75k in the bank (after corporation tax had been paid) and took it all as a dividend. The dividend was taken in January 2021. He is usually a basic rate tax payer but this dividend has pushed him into the 6 figure territory and all the tax liability associated with it. He has no need for the money right now and just has it sat in an account.
The company tax return has been completed with the corporation tax paid and dividend shown on it.
We think he should have just kept it in the company and draw down the money over a number of years to minimise the tax paid while staying a basic rate tax payer.
He hasn't signed off his self assessment from his accountant (yes! He has an accountant who we feel should have pointed the potential tax savings out but that's another post. He'll probably be changing accountant after this) yet so we are seeing if it is possible to reinstate the company and return the dividend.
I guess my question is can we restore the company with the intention to amend the company tax return and declare a lower or no dividend. The money would be returned to the company bank account.
Comments
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You can re-open the company but I don't think there is any way to wind back the dividend issue.
I don't see the accountant being in the wrong.
If he was told that the company was being dissolved he would deal with the accounts based on that. He wouldn't have been aware of the reasons to shut the company so was not in a position to advise keeping the company running for a number of years for tax minimisation.
I'm guessing your father just told the accountant that he was dissolving the company and final accounts needed doing rather than asking about the best tax efficient way to do it3 -
No matter how awkward or uncomfortable it may seem, I would suggest an open and honest sit-down (covid permitting) discussion with the accountant. As unforseen said, it all depends on what the instruction was i.e. wind-up company or wind-up company in the most personally tax efficient manner possible.
As it appears to be quite solvent I understand (this is not my area but I have been looking into it for my wife's small business) and the options are to either (1) informal or voluntary strike off or (2) Members Voluntary Liquidation ("MVL") - this seems quite onerous as it must be done by a licensed insolvency practitioner, but you do generally get what you pay for.
Under option 1, any profits < £25K are treated as capital and CGT applies (and probably entrepreneur's relief tax at only 10% after the CGT exemption); if >£25K then it is treated as a dividend distribution at the dividend rate (this sounds like what happened).
MVL are more complex and costly, but the professional fees are probably much lower than the tax bill i.e. £2K-ish for a practitioner but then you have £12K-odd exemption and only 10% CGT tax rate.
Sit down with accountant and establish exactly what was requested - I would normally expect an engagement letter for a piece of work like this, but it should be documented. It is a tough lesson but tax (even after 30+ years in the business) is monumentally complex and I'll be seeking advice on liquidating my wife's business and that only has £20K of retained profit.
Good luck.
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chip2000 said:
I guess my question is can we restore the company with the intention to amend the company tax return and declare a lower or no dividend. The money would be returned to the company bank account.
Your Dad should have taken advice before he decided to pay a dividend and close down the company.
Had it been a mistake, then he may have been able to salvage the situation, i.e. had he not confirmed it was a dividend in the accounts/CT return, but by declaring it as such, he's just confirmed it, officially, that it WAS a dividend. Also, it may also have been recorded as a dividend in the book-keeping and the bank transfer may have also had a narrative of "dividend". If you want to unwind all this, there needs to be "evidence" at every step of the way that the payment was something other than dividend.
I think your Dad just needs to put his mistake down to experience.
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KingOfSnake said:No matter how awkward or uncomfortable it may seem, I would suggest an open and honest sit-down (covid permitting) discussion with the accountant. As unforseen said, it all depends on what the instruction was i.e. wind-up company or wind-up company in the most personally tax efficient manner possible.
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He said he did ask his accountant about other tax liability on top of the corporation tax but at the moment it's a bit of he said, she said. I guess he'll have to live with his 20k mistake.0
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