Financial Matters

With David Frederick FCCA | Marcus Bishop Associates | marcus-bishop.com

Is it your money?

It has become abundantly apparent that an army of aspirant small business owners who set up limited companies are oblivious to the world into which they are entering. Moreover, they are often reluctant to seek professional advice of any description because they believe they know it all! Otherwise, they would seek advice. Their naivety, neglect of the law or sheer arrogance becomes self-evident when they eventually realise, they cannot produce company financial statements for either Companies House or HMRC. Furthermore, they often fail to recognise that Companies House and HMRC are two different agencies and they each require different financial statements. It is amazing.

Perhaps the reason for UK small company failure is the obsession with the ease and cheapness in the

UK of company formation. Too many people think they can do it because it is so easy. One may understand their inability to recognise that company directors do not own any company. Shareholders own companies.

Furthermore, one may even forgive them for using directors and shareholders interchangeably.

However, there must be no understanding, tolerance or forgiveness for the extraction of company funds without either a payroll or knowledge of profit reserves. Too often one hears variations of this sob story, “I just paid myself from the company by transferring the money to my personal account.” Let’s be quite clear, the funds in a company does not belong to any individual irrespective of what they think or have been advised by any adviser in their local public house or they have researched and misunderstood on the internet.

Whether you are a sole shareholder-director or one of many shareholder-directors the company funds are not and never shall be yours. In short, the action of transferring funds from a limited company to a personal account without appropriate, sufficient, relevant, verifiable evidence is theft. If this sounds unfair, just ask yourself, as an employee would you ever just take money from your employer’s bank account? If the answer is, no, theft is fair.

Such behaviour by shareholder-directors is selfevident that they have failed to fully understand and abide by the seven core principles of a company director. Remuneration of any employed director or employee of a UK limited company must be undertaken via a HMRC registered payroll. This is not optional or something you can overlook and justify non-compliance. A payroll should be setup in advance of any desire to remunerate any employed director or employee. Some small company shareholder-directors champion being rewarded by dividends. This is an alternative to salary, but the two are not synonymous and they do not have the same accounting and taxation treatment in company financial statements. This subtle differentiation is often ignored, overlooked or misunderstood by the vocal champions of dividends. Dividends are distributed to shareholders from the company’s post tax profit and accumulated profit reserves. Therefore, before a dividend can be declared, the company must have distributable profits after corporation tax. To know if the company has distributable profits, financial statements for the month or quarter must be produced. This may be a shock to the army of small companies who rush to find an accountant after 12 months of trading. Vocalising the words is very much easier than understanding its meaning and the process. To close the door on dividends, if the company does not generate a profit, it cannot make any “lawful” dividend distribution. The payment of a salary does not require a company to have made a profit but does require a HMRC registered payroll. Salaries are an allowable business expense before the charging of corporation tax. Dividend payments are payable after corporation tax if the company has any distributable profit. The remuneration of shareholder-directors requires stopping and reflection before any decision.

Room 12a

Unlike Harley Melton you won’t regret entering Room 12a….

• Vintage posters and lobby cards • Original drawings and paintings • Parody Mexican retablo (visit to find out more!) • Mid-Century modern ceramics And…and…and…

Room 12a is in Holdrons Arcade, 135a, Peckham Rye Lane, SE15 4ST Instagram: @Room12a_ Open: Wed-Sun 11.30- 6.00pm

*From the dust jacket for Anne Marsh’s 1920s murder mystery ‘Room 12a’: ‘She saw something which turned her blood to ice – Harley Melton lay there murdered…’