It is a question that as accountants, we are asked a lot- ‘if my company bank account has £X, why is my profit available figure only showing £X? Why can’t I withdraw the whole amount?’.
So, in this week’s blog, we take a look at the reasons why those two figures may differ, and why you should always refer to what profit is available to withdraw as a dividend, rather than what money is actually in the company account.
Outstanding taxes
Perhaps the most common reason for a discrepancy between bank balance and profit available, is down to taxes due. The amount available to take as a dividend must take into account any taxes that would be due on your profit. This would include corporation tax, VAT and PAYE.
Whilst the corporation tax isn’t payable until your company year end, it needs to be accounted for on an ongoing basis. So, as a rough example, if you invoice £1000 and this is paid to the company, there would be£1000 in the account, but only £190 of that would need to be set aside for corporation tax at 19% (ignoring any deductible expenses for the purpose of this illustration).
The same would go for VAT. If the company is VAT registered, then that same £1000 invoice would need to be raised with £200 VAT. As a result, you would be paid £1,200 into the company account, but £200 would need to be paid over to HMRC when your VAT return is due.
PAYE is also usually paid on a quarterly basis, so if you have employees and are paying tax/NI attracting salaries, you will have held that PAYE back from their salary, but it will only be paid over to HMRC once a quarter, again meaning that your bank balance will differ from what is actually available.
Trade debtors or creditors
Another common reason why the figure may differ will be that the distributable profit figure will include any invoices raised to date. However, it will not take into account whether that invoice has been paid. Therefore, if you have any unpaid client invoices (trade debtors), then this will also have the effect of making the distributable profit figure potentially appear higher than the company bank balance.
This will also be the case with any money that you owe in respect of supplier bills for example. If you have purchased something on credit with a supplier, then the cost of that purchase will lower the profit distributable, but will obviously have no effect on the company bank balance until it is actually paid.
Timing
Accounts, by current legislation, should be prepared on an accruals basis- i.e. expenses/income should be matched to the accounting year that they relate to. Therefore, when accounts are prepared, adjustments may be made to move certain expenses/invoices into different years (regardless of payment date) to ensure that are accounted for correctly. This in turn can affect the distributable profits figure as an expense/invoice that has been paid will change the bank balance figure, but may not affect the distributable profit figure until the following year in which it is accounted for.
Director’s loan
If the director owes or is owed money to/from the company, this will also cause a difference between the bank balance and distributable profit figure. If the director has taken a loan from the company (which itself has tax implications) then the company bank balance will show less than is actually available to take as dividends (as that loan amount is still the company’s money, and therefore still part of its profit). If the company owes the director money (for example, in respect of expenses repayment), then the opposite will be true.
Important note
It is worth pointing out that it is illegal to pay yourself a dividend if there is not sufficient profit to do so. Therefore, it is incredibly important therefore that, when it comes to taking a dividend from the company, you pay close attention to the distributable profit figure rather than what’s in the company bank account. At PaperRocket Accounting, our monthly fee includes a subscription with FreeAgent, an award winning online cloud accounting software that provides you with your own company ‘dashboard’, giving you an up to date view of not only what is in your company bank account, but also, perhaps more importantly, what profit is available to withdraw as a dividend. This figure on the dashboard automatically takes into account all of the above, so you will never need to worry about withdrawing an illegal dividend.
PaperRocket Accounting provide accounting and tax services to professional contractors, freelancers, and small businesses working in the UK.
We offer our clients a flexible choice of fixed fee monthly packages which cover all of their accounting and tax needs (so no hidden costs or surprise bills!). All of our accounting packages include a monthly subscription for a cloud accounting software subscription provided by the awarding winning FreeAgent.
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