is this illegal (regarding Limited company dividends)

[mubu]

One person is going to do this to get his tier 1 general renewal:

he has setup a limited company, he is sole director and 100% share holder.

he is depositing money every month in the business account (his personal money) and then withdrawing it as salary (and dividends every month).

So, though he is effectively unemployed, he is showing earnings and paying tax.

I thought this was illegal, but he says that HO does not check bank statements and invoices, he just will show 1. salary slips 2.dividend vouchers 3. letter from accountant and P&L, balance sheet

Wont the HO check how the money comes into the business???

Mods please delete this thread if inappropriate.

[ChetanOjha]

A person can keep investing in his business to keep the business afloat. This investment can be used to pay salary of the staff, buy material or any other business related expenses.Most of the time people invest at the time of business startup and work towards to get the money back from business.

Yes HO will check whether or not person is earning enough of not. As far as P&L is concerned your friend only have losses to show in the company accounts.Also since he is not doing any business his invoices will be obviously forged and he run a greater risk of being caught. If your friend is caught "anytime" in future his will loose his stay in UK.

One person is going to do this to get his tier 1 general renewal:

he has setup a limited company, he is sole director and 100% share holder.

he is depositing money every month in the business account (his personal money) and then withdrawing it as salary (and dividends every month).

So, though he is effectively unemployed, he is showing earnings and paying tax.

I thought this was illegal, but he says that HO does not check bank statements and invoices, he just will show 1. salary slips 2.dividend vouchers 3. letter from accountant and P&L, balance sheet

Wont the HO check how the money comes into the business???

Mods please delete this thread if inappropriate.

[John]

The company is only allowed to pay dividends out of profits that have already been made. So if no profits have been made, indeed a loss has been made, the company is not allowed to pay dividends. That would be a breach of Company Law.

[push]

Although money is fungible, investment by shareholders in the business are shareholder's funds and sit in the Balance sheet - not pass through the P&L.
So effectively the company is not making any profits if there is no operational activity. As far as I understand, a Company can pay dividends as long as it has distributable reserves BUT which auditor will sign off such a company as a going concern? Secondly, I am not sure how the funds are being paid out of the company but immediately after payment of the first Salary the Company will have a net negative assets and after a few months potentially bankrupt!!

In any case its not about befooling the system by trying to meet the requirements by devising innovative but illegal methods.

[John]

The situation regarding what can be paid out as dividends is explained rather well by this webpage.

[push]

The situation regarding what can be paid out as dividends is explained rather well by this webpage.

Thats an excellent explanation relevant to the issue. When I mentioned above that even a loss making company can make distribution as long as it has distributable reserves - the idea is that the distributable reserves cant build up in a loss (regularly) making company. The point is covered on the link provided by John:

You do not need to take out the maximum available dividend in every month. It is often better to take out what you need to live on and leave a balance in the company for future dividend distribution.

[push]

Please see this link for further explanation:

The Companies Act 1985 section 263 states 'a company shall not make a distribution except out of profits available for the purpose'. 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

[John]

Yes of course, but how does that help here? There is no evidence that the company has made profits in the past.

[push]

Yes of course, but how does that help here? There is no evidence that the company has made profits in the past.

I think we are towing the same line here. I clearly said although a loss making company can make distribution as long as it has distributable reserves but this would not be possible in this case:

BUT which auditor will sign off such a company as a going concern? Secondly, I am not sure how the funds are being paid out of the company but immediately after payment of the first Salary the Company will have net negative assets and after a few months it will potentially be bankrupt!!

I have in fact challenged the legality of the arrangement in my post

[Sushil-ACCA]

A person can keep investing in his business to keep the business afloat. This investment can be used to pay salary of the staff, buy material or any other business related expenses.Most of the time people invest at the time of business startup and work towards to get the money back from business.

Yes HO will check whether or not person is earning enough of not. As far as P&L is concerned your friend only have losses to show in the company accounts.Also since he is not doing any business his invoices will be obviously forged and he run a greater risk of being caught. If your friend is caught "anytime" in future his will loose his stay in UK.

One person is going to do this to get his tier 1 general renewal:


he has setup a limited company, he is sole director and 100% share holder.

he is depositing money every month in the business account (his personal money) and then withdrawing it as salary (and dividends every month).

So, though he is effectively unemployed, he is showing earnings and paying tax.

I thought this was illegal, but he says that HO does not check bank statements and invoices, he just will show 1. salary slips 2.dividend vouchers 3. letter from accountant and P&L, balance sheet

Wont the HO check how the money comes into the business???

Mods please delete this thread if inappropriate.

Nice explanation - Chetan , carry on , regards

[Sushil-ACCA]

that is why

HO is asking beside Dividend voucher

Sales summmary of company

net profit statement of company

Accounts of company

with bank statements

Accountants need to know his client , see books are not made of fradulent transaction -atleast apparently

take care of money laundering act.

last if no profit no dividend -general rule

[John]

Accountants need to know his client , see books are not made of fradulent transaction -atleast apparently

But in practice, how? That is, the great majority of limited company accounts are not audited these days, and indeed a number of Accountants do not do audits.

And if a limited company does not require an audit, accordingly to Company Law, and the client is not prepared to pay for an audit, what then?

[Sushil-ACCA]

Accountants need to know his client , see books are not made of fradulent transaction -atleast apparently

But in practice, how? That is, the great majority of limited company accounts are not audited these days, and indeed a number of Accountants do not do audits.

And if a limited company does not require an audit, accordingly to Company Law, and the client is not prepared to pay for an audit, what then?

AUDIT IS compulsory by law when some conditions r met

TURNOVER 6.5 million

no of employees more than 50

asset base above 3.2 million etc, etc

http://www.companieshouse.gov.uk/about/ ... html#three

in reality audit is now though business , auditor may be sued by shareholders , so many accountants avoiding audit.

all accounts which we most r needing for HO point are unaudited accounts

audit need lot of time and experties to compete , whcich cost to company so small self managed company it is not beneficial untill third party interest involved.

[John]

AUDIT IS compulsory by law when some conditions r met

TURNOVER 6.5 million

no of employees more than 50

asset base above 3.2 million etc, etc

Exactly, the great majority of companies are not required to have an audit.

so many accountants avoiding audit.

all accounts which we most r needing for HO point are unaudited accounts

audit need lot of time and experties to compete , whcich cost to company so small self managed company it is not beneficial untill third party interest involved.

Exactly, but against that background, how is an accountant to spot a situation that is totally fraudulent?