I am a year and a bit into an IVA. I have changed career and now work in projetc management so I want to operate through a limited company which I have just set up. I've been advised that it is most tax efficient for me to not be paid a salary by the company, but to take dividends as a shareholder - however if that's what I do how will I prove my income for my IVA and can they force me to increase the amount I draw from the company in order to make higher payments to my creditors? Or would dividends be trated in the same way as bonuses and overtime (in which case I'd have to pay 50% into the IVA)?
I have just formed the company but my I&E review is due in April so I will only have been trading for a couple of months when they do it - as such there will be no tax return etc for the IP to use to verify my income. If I will take my income as dividends do I just have to give a figure as my projected income and as long as that covers my expenditure without having to reduce my repayments will the IP be likely to accept the figure?
Complicated I know - I can't wait til the IVA is over!
Seems strange not to receive any salary at all as you can earn over £6k per year tax free which would reduce the corporation tax bill thus increasing the net income. Are you operating via an umbrella company or are you the sole director and shareholder?
Dividends do form part of an income and are taken into account for IVA purposes. However, the IP will want projections and year end accounts to ensure that creditors are receiving their fair amount. You cannot just take enough in dividends from the company to meet your IVA payments and leave the rest in the company until the IVA is over. Speak to your IP as it is quite common although the tax savings are usually negligible when the increased costs of paperwork and audit fees are taken into account.
If the company pays me a salary rather than taking any money out as dividends would the IP still be able to insist on seeing the company's year end accounts and try to force me to increase my salary in order to make higher payments to creditors.
And can I really ne forced to pay higher dividends; if the company's money is not legally my money how can the IP force me to increase dividends to make higher payments to ceditors? Surely as long as I do not reduce my payments to creditors they should have no reason for complaint?!
I'm finding it incredibly difficult to live with an IVA and I want it to end as soon as possible. I was hoping that operating through a ltd company would allow me to keep some money in the company and pay myself a dividend in order to offer a full and final settlement to creditors and end the IVA early.
Your IP could demand higher dividends be taken from the company as you are the sole shareholder and although the money belongs to the company, the company belongs to you. The IP would not ask for an increased salary as this would not be tax efficient but would not allow retained profits to be used as a full and final as the money should have been paid out as a dividend anyway. The year end accounts would have to be produced to ensure that this is not happening.
If you are struggling with the IVA it may be advisable to apply for a variation to reduce payments to make the remainder of the term more manageable.
It will not be permissible to draw a salary out of the company sufficient to meet your IVA payments, and ignore the fact that you could be building up reserves within the company which ought to be drawn down. Your IP will need to see the limited company accounts annually, to make sure that this is not happening.
A variation wouldn't really help me; I'm struggling with the IVA because of the depressing, constantly broke lifestyle the out of date I&E budget constraints (which haven't been updated since I first contacted my IP in 2006 despite the increase in the cost of living)inflict upon those in an IVA. I really can't go on like this!
Anyway back to the point in hand. Surely they can't demand that the company pay out ALL income as dividends and not retain any profit. How is the business supposed to expand and grow? Or have some reserves in case business slows down?
I would not offer a full and final settlement from the company directly. I would hope to grow the business until such a time as there was enough profit to pay myself a good dividend but still sustain the company and then offer a final settlement. In the meantime I would be paying well over 50% of the profit to myself in dividends to cover my living expenses and maintain my IVA repayments in the first couple of years. I don't expect massive profits to remain in the company when I just start out but would hope to start earning enough to think about settling the IVA within 2-3 years.
Out of curiosity; if I work for the company and I am paid a salary is there a rule that says I have to tell the IP that I own the company? When it comes to my I&E review could I not just provide my contract of employment and wage slips as I would in any other job? Of course it would take forever for me to make any profit operating that way!
Did you have the company when you entered into the IVA? Was it disclosed and the shareholding valued? You are obliged to make full disclosure to your IVA, and a failure to do so could result in its ultimate failure.
I didn't have the company when I entered into the IVA, I have recently changed careers and as I do project based contract work I often change employer, I was hoping to form my own company to just remain consistently employed by one company rather than change employer every 6 months.
This is, in my opinion, one of the flaws in the IVA system. If you are in a position to hide/store income then who raelly is in a position to unravel it? What you are proposing looks on the face of it primarily like a tax avoidance, however by default it's also an IVA avoidance scheme. Two months ago I would have had taken a high moral opinion, however the way my creditors have behaved so badly I am now not so sure!
I'm definitely not trying to avoid paying tax, I have no problem whatsoever with doing that whether I pay through PAYE or though paying tax on dividends from my company.
However as I mentioned I find the IVA budget to restrictive to stick to long term but i can't save anything from my regular income while I'm in my IVA, I can't get a second job to save up the money to pay it off early (or even to have a social life) as I'd just have to put the money into the IVA - yet the only way to end it early is to offer a lump sum. So I'm trying to find a way to get a lump sum together.
So I wouldn't call it IVA avoidance but more like trying to find an IVA exit strategy as the whole thing is driving me crazy and not good for my mental or physical health - stress takes its toll on the body!
Hi
You should have had an income and expenditure review each year.
It is sensible to use a limited company as your net earnings will be less of a burden on your new company, however as others have said you will be expected to draw as much as is REASONABLY possible to whilst still keeping the company solvent and viable.
Speak and take advice from your IP
Regards
In your industry, having a limited company is a good idea to keep your business finances away from your personal finances, and a lot of the people you are contracting with will expect to see this. But you should tell your IP about the way you are trading.
