How have they come to this conclusion?

[2712]

Self employed (ltd company status).
total income for last year was £51,000 and outgoings were £47,000.
Accountant has just finished my books and has informed me that I made a profit of £16,000.
How did he come to this conclusion.....I am stumped.
Any advice?

What were the outgoings? We're some of them not allowable or classes as assets where you claim a percentage each year (car, computer, buildings etc)?

Majority were for materials that were needed for the jobs.
A bit for stationery, and the rest were dividends that I draw instead of a wage.

Dividends are taken out of the profit. They are a distribution of the profit.

Still none the wiser......does that mean that the £12,000 in dividends is classed as profit?

Right it's the dividends then

I'm a partnership and the profit is calculated before the drawings are taken

For a ltd company (my parents run one & take dividends) I think that corporation tax is payable on the profit but it works out Jess than if you had to pay tax and NI in salary.

Works out less even.

dividends are taken AFTER tax so your profit was
£51k - £47k + £12k = £16k
for tax purposes
and the £12k is deemed taxed at source so you have no more to pay
I take it you DID draw a wage (if you are not on PAYE elsewhere)

Yes you do need to draw a small wage as well just to keep your pension etc entitlements.

Don't draw a wage, just the dividends.
Also have a tax bill of 3,500 to pay and about the same for corporation tax.
Suprisingly my accountant ensures me I am better off as a ltd co rather than sole trader ( although hos bill of £1400 has nothing to do with it!)

How much!!!!

Do you have any other employees? That sounds very steep. Do you do any basic bookkeeping yourself or dies he do everything. (Its cheaper if you enter things into a spreadsheet etc.

If you don't draw any wage you have no maternity/paternity/pension/ job seekers etc entitlements.

corporation tax should be 20% of your profit = £3,200 but i cant see where a personal tax liability of £3,500 comes from if your only personal income was the £12,000 dividends.

oh and your accountant definitely seems to be a bit expensive, or you should be doing more of the basics yourself.

why don't you draw a salary? Do you use up your personal allowance elsewhere? If not you should be paying yourself a salary up to the personal allowance to take advantage of this and get almost £9,000 tax free.

Your accountant doesn't actually ensure you are better off! Any accountant would do... you are better off because you don't pay national insurance on dividends.

£1400 isn't a bad rate assuming they do your bookkeeping, annual accounts and CT600

Is the 12k the only earnings you make? if so, why are you paying £3.5k tax?

Why are you not paying yourself a salary from the company?

Operating profit is before tax and dividends
then you take the tax off
then the dividends come out at the end

I must say as an accountant in practice, I'm unimpressed that he/she hasn't given you a breakdown of your "proft" or have they and you don;t understand it?

Child benefit with a child under 12 gives you credit towards state pension

I am as confused about this as anyone.
Apparantly I have made a profit of £16,000. I now have to pay tax bill of £3,500 and the same for corporation tax. I also have to pay accountant £1,400 for doing the end of year accounts. That does not include about £1,500 over the whole year for forms that he sends that I fill in then he scans and sends to whoever and then charges me for.
I do all the paperwork, filling in the spreadsheets every month with a total figure, combing the diary and bank statements and cheque books, etc. He just gets the finished article at the end of the year to do the end of year stuff.
No wonder so many small businesses go under!

Yes. I get a profit and loss summary.

I am a partnership with 8 partners. A similar turnover to yourself. I do enter all mybincomings and outgoings into a computer programme (zero) and hand over invoices & receipts. My accountants bill is under £900

My parents run a limited company with 25 employees snd rather a large turnover. Manual bookkeeping records are kept. She runs her own payroll the accountancy bill is about £1,700

you need to get his full calculation as the income tax calculation seems way too high

you should also be drawing a salary. salary will be a deduction for tax purposes. it is about striking the right balance between salary and dividends that makes being ltd efficient

What forms?

Find a new accountant!

If you paid yourself no salary and make £16,000 in profit before tax and dividends then whether you are better off as sole trader or limited company is moot point. I doubt you are by the time you've paid your accountant to do your annual accounts.

I use rule of thumb with clients (depending on their personal tax position) of about £20,000 to make enough savings to pay the extra filing and accounting fees. Though the added protection of limited liability is worth something intangible.

It does occur to me that your £1,400 may include your personal tax return too (though like the others unless you have other income I don;t see how you can be paying £3,500 in income tax).

Agreeing with kewcumber

My partnership isn't high risk in that there are no significant debts as such. We don't get paid afte work is done etc

My parents are in the construction industry, high risk. Work has to be financed and often paid late therefore having limited liability makes sense even when dad was a one man band.

Well I have an appointment with him at 10 tommorrow to discuss my worries. But I fear that he will bamboozle me with accountant speak (not my strong point obviously), and I will end up leaving his office no better off.

Unless you have a VERY complex business £1400 a year is too much for annual accounts and CT600. A fairly pricey accountant in west london would charge you (assuming your bookkeeping is in a good state) £1300, a small operator like me with lower overheads would charge £700 - so you should be able to half your year end fee alone by moving your business.

PM me and I'll help you ask the right questions.

Thanks for the advice KEW.
Apparantly, and this was only because I spotted the mistake, the junior accountant who did my books carried over £6,000 from 2011. This explains why my profits for 2012 were 3x higher than in 2011. so in actual fact I did not make £5,000 profit in 2011 but £11,000 and in 2012 it was actually £10,000 profit not £16,000. This also explains why my corporation tax for 2011 was only £900 and in 2012 was £3,500!
Glad that its all been explained to me but it was only my spotting the error that it was sorted........still got a huge bill though.
Should I change my accountant