Small company - Capital Allowances

Discussion in 'Askaboutbusiness' started by rahmalec, 9 Apr 2019.

  1. rahmalec

    rahmalec Registered User

    Posts:
    9
    Could someone help me understand this following situation? It's probably simple enough but my brain doesn't seem to want to understand it.

    Company A (with one director, myself) has been running as follows for a number of years. Numbers are made up for the purpose of the example:
    - Income 30k
    - Regular expenses (not including salary) 10k
    - Salary 20k
    - Company profit: 0

    In 2019 the income again is 30k and regular expenses are 10k.
    A capital item is bought for 8k.
    Now the profit and loss should show:
    30k - 10k - 1k (12.5% of 8k) which equals 19k.
    However, there is only 12k left in the account take out as salary so that means the accounts will show 7k as profits. This is a pain since corporation tax must now be paid on this!

    In 2020, income is again 30k and expenses 10k.
    The profit and loss will show 19k profit before salary (taking into account the 12.5% of 8k as capital allowance), but there will be 20k in the account. If 19k is paid out as salary, what happens with the 1k left?


    Of course I'll be talking to my accountant to see what the best this to do is, but I just want to understand it. It seems that it should balance out at the end of the 8 years but does it?
    One way I can see out of having to pay corporation tax in 2019 is to lend 7k myself to the company. That way a salary of 19k can be paid in 2019, bringing the profit to 0. Then what I lent to the company can be repaid over the next 7 years at 1k per year.

    Something is telling me this isn't the best idea ... and what if I don't have 7k spare to lend?
     
  2. Walker

    Walker New Member

    Posts:
    1
    You only need to pay the tax on the salary you don't have to pay it to yourself if the funds are not in the bank. It will show as a director's loan account on the balance sheet.
     
  3. cremeegg

    cremeegg Frequent Poster

    Posts:
    2,687
    The issue is that the company has not got sufficient cash to distribute all its profits.

    You are going to have to borrow the money from somewhere to fund the distribution, if you don't want to pay tax on the profit.

    Your analysis is spot on.

    Walkers suggestion will work, but you get to pay the tax, that way.
     
  4. rahmalec

    rahmalec Registered User

    Posts:
    9
    OK thanks very much for the info.