Author: Glenn

There is a basic principle that dividends or other distributions must not be paid out of capital even if the Articles of a company authorise such a payment. For the purposes of this article, reference to distributions includes dividends.

This is stated as follows in Companies Act 2006, section 830:

Distributions to be made only out of profits available for the purpose

(1) A company may only make a distribution out of profits available for the purpose.

(2) A company's profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.

(3) Subsection (2) has effect subject to sections 832, 833A and 835 (investment companies and Solvency 2 insurance companies).

HMRC’s internal manuals go further and states that the Act lays down what may be termed the ‘balance sheet surplus’ method of determining profits available for distribution. Under this, a company can distribute the net profit on both capital and revenue at the particular time, as shown by the relevant accounts.

Section 830 lays down the basic rule, but it does not apply to investment companies and is qualified in respect of public companies by section 831. It states that a company’s profits available for distribution are its accumulated, realised profits (on both revenue and capital) not previously distributed or capitalised, less its accumulated realised losses (on both revenue and capital) not written off in a proper reduction or reorganisation of capital.

These definitions for smaller companies can be summarised as, dividends can only be paid if there are sufficient revenue reserves – excluding issued and paid up share capital – to cover the payment. Directors should have sight of up-to-date management accounts when making a judgement regarding a proposed dividend payment and the accounts should include a realistic estimate for any current year corporation tax liability.

If you are uncertain if your company meets these obligations, please call. We can help you crunch the numbers.

The mandatory rollout of Making Tax Digital for Income Tax (MTD for ITSA) is scheduled to begin in April 2026. The process will significantly adjust how businesses, self-employed individuals, and landlords engage with HMRC. The system will require businesses and individuals to register, file, pay, and update their details through an online tax account.

It is important to begin to consider using accounting software that is equipped to send updates to HMRC in preparation for the launch of MTD for ITSA in April 2026.

According to HMRC, the software must be capable of:

• creating and storing digital records of your business income and expenses — you can choose to use spreadsheets with compatible software to do this;
• sending quarterly updates;
• submitting your tax return by 31 January after the end of the year; and
• receiving information from HMRC.

The MTD for ITSA rules will initially apply to businesses, self-employed individuals and landlords with an income of over £50,000 annually. MTD for ITSA will then be extended to those with an income between £30,000 and £50,000 from 6 April 2027. A new system of penalties for the late filing and late payment of tax for ITSA will also apply. At present there are no plans to extend ITSA to smaller businesses with income below £30,000 or to Corporation Tax.

Readers affected by this forthcoming change who have not yet converted to the use of an MTD compatible accounting software should consider their options, and we can help. Please call.

Asking your accountant for advice offers a range of benefits, particularly in guiding both business and personal financial decisions. Here are some key advantages:

Expert Financial Guidance

Accountants are trained professionals with deep knowledge of tax laws, financial regulations, and best accounting practices. They can provide tailored advice on managing cash flow, budgeting, and financial planning to ensure your business remains financially healthy.

Tax Efficiency

One of the more significant advantages is receiving advice on how to reduce your tax liability legally. Accountants can help identify deductions, allowances, and tax reliefs you may be eligible for, ensuring you are not paying more tax than necessary.

Compliance with Laws and Regulations

Tax laws and regulations are constantly changing, and it can be challenging to stay updated. Accountants can ensure that your business complies with all relevant legislation, helping you avoid penalties, fines, and potential legal issues.

Business Growth Support

If you are looking to expand your business, accountants can offer strategic advice. They can help you analyse your financial data to make informed decisions, plan for future investments, and ensure that your business grows sustainably.

Risk Management

Accountants can assess financial risks associated with various business decisions and suggest ways to mitigate them. Their expertise helps in identifying potential financial pitfalls and ensuring you are prepared for unexpected expenses or downturns.

Improved Cash Flow

Proper cash flow management is crucial for any business. Accountants can advise on how to maintain healthy cash flow, ensuring you have enough liquidity to cover operational expenses and make investments when needed.

Financial Forecasting

Accountants can help you create financial forecasts and projections, which are vital for decision-making and securing financing. Their insights into future income, expenses, and profitability are invaluable for long-term planning.

Access to Professional Networks

Accountants often have a broad network of contacts in the financial, legal, and business communities. They can connect you with other professionals, such as solicitors or financial advisors, to further support your business.

If you feel you may benefit from support in any of these areas, please call, we can help.

Overtrading occurs when a business expands its operations at a pace that exceeds its available working capital and financial resources. This can happen when a company takes on more business than it can sustain without sufficient cash flow to support day-to-day operations.

Here are key points about overtrading:

1. Cash Flow Strain: Overtrading often leads to a cash flow shortage, as the business needs more funds to pay suppliers, cover increased inventory, and finance its operations. The gap between receiving payments from customers and paying suppliers can stretch too far.
2. Inventory Buildup: To meet increased demand, companies may overstock, tying up capital and cash flow to purchase goods that have not been sold.
3. Borrowing Pressure: To support rapid expansion, businesses may rely heavily on borrowing, leading to high-interest costs or increased debt, which further strains the company's finances.
4. Declining Service Quality: Overtrading can cause operational inefficiencies, leading to delays in fulfilling orders or a decline in the quality of products or services as the company struggles to manage increased demand.
5. Risk of Insolvency: If the business cannot manage the financial stress, it risks insolvency. For example, where it becomes unable to meet its short-term obligations, such as paying creditors or employees.

A common situation occurs in retail when a business takes on a large number of orders without sufficient stock or cash reserves to fulfil those orders, leading to delays, missed payments to suppliers, and financial instability.

Effective management of cash flow, maintaining adequate working capital, and carefully planning growth are crucial strategies to avoid overtrading.

1 October 2024 – Due date for Corporation Tax due for the year ended 31 December 2023.

19 October 2024 – PAYE and NIC deductions due for month ended 5 October 2024. (If you pay your tax electronically the due date is 22 October 2024.)

19 October 2024 – Filing deadline for the CIS300 monthly return for the month ended 5 October 2024. 

19 October 2024 – CIS tax deducted for the month ended 5 October 2024 is payable by today.

31 October 2024 – Latest date you can file a paper version of your 2023-24 self-assessment tax return.

1 November 2024 – Due date for Corporation Tax due for the year ended 31 January 2024.

19 November 2024 – PAYE and NIC deductions due for month ended 5 November 2024. (If you pay your tax electronically the due date is 22 November 2024.)

19 November 2024 – Filing deadline for the CIS300 monthly return for the month ended 5 November 2024. 

19 November 2024 – CIS tax deducted for the month ended 5 November 2024 is payable by today.