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interim dividends

We have recently read that an interim dividend, which is documented by a director's minute and dividend voucher and also credited to his/her director's account on that day, will not be valid for tax purposes unless payment is actually made. Furthermore if payment is made at a later date, the dividend is treated as received according to the date of payment, not the date of the accounting entry.

Has anyone tangled with this and is this correct?

howard walters


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27th Aug 2003 11:50

interim dividends
The terms 'interim' and 'final' are not sufficiently precise.

The key issue is whether there is a binding relationship of debtor and creditor between the company and shareholder. A resolution at an AGM creates this immediately, unless the dividend is expressed as payable in the future. Tax consequences take effect at the same time. A resolution by the directors does not have the same legal effect because it can be rescinded at any time before payment. Under a directors' resolution, actual payment is the trigger for the tax rules to take effect.

Book entries can amount to payment in some circumstances but this depends on all of the facts.

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27th Aug 2003 15:57

Hold an EGM in respect of interim dividend?
On the basis of the comments made so far, if the directors and shareholders are one and the same and they hold an EGM on the same day as the board meeting in respect of an 'interim' dividend, would the tax consequences be the same as for a 'final' dividend?

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29th Aug 2003 09:08

Is there any difference?
A final dividend may not be physically paid but merely credited to the director's loan account. Usually that would constitute constructive payment and therefore clear a prior debit balance on the account.

But the same is true of an interim dividend credited to a loan account. It also usually constitutes constructive payment and therefore clears a prior debit balance.

Converting an interim dividend into a final dividend doesn't really impact the question whether crediting the physically unpaid dividend to the loan account constitutes constructive payment that clears the account.

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29th Aug 2003 11:27

Interim Dividends
I am afraid that I cannot agree with John's latest comment.
The distinction between the legal relationship created by interim or final dividends remains. The date of the resolution for a final dividend operates as the date of the dividend for tax purposes - irrespective of whether book entries are then made. A shareholder could sue for non-payment of such a dividend. An interim dividend remains at the whim of the directors and is not effective until actual payment takes place. The shareholder cannot sue for non-payment. The position was explained fully in Potel v CIR.

Crediting an interim dividend to a director's loan account where the company lacks the resources to pay it (perhaps it is up to its overdraft limit) might not constitute effective payment.

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28th Aug 2003 09:21

Interim and final dividends
The point is: on whose authority is the dividend paid - the directors' or the shareholders'?

If the authority is a resolution of the directors exercising powers they have under the Articles, then the dividend is an interim dividend.

If the authority is a resolution of the shareholders acting in General Meeting then the dividend is a final dividend. Often, the Articles provide that a final dividend cannot exceed an amount recommended by the directors.

Where the directors and the shareholders are the same people, the question will be in what capacity they are acting?

If they meet as directors and pass a resoltion to pay a dividend, it has, at that stage, the status of a proposed interim dividend. If later that same day, they meet as shareholders in a duly convened General Meeting and authorise the dividend previously proposed by themselves acting as directors, then the dividend becomes a final dividend (because it is now authorised by the shareholders). The tax consequences will then be as for any other final dividend

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26th Aug 2003 17:05

IR manuals
Have the IR manuals changed?

I quote from CT2007b, para 13:

In the case of an interim dividend (which does not create an enforceable debt and which can be varied or rescinded prior to payment), payment is only made when the money is placed unreservedly at the disposal of the directors/shareholders as part of their current accounts with the company. So, payment is not made until such a right to draw on the dividend exists (presumably) when the appropriate entries are made in the company's books.

End quote

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By Anonymous
26th Aug 2003 18:06

We believed that they had!
The understanding that the manuals had changed came from the Spring CIOT conference at which a well respected Tax Barrister spoke on the subject. Following this, both I and a colleague checked the manuals (I'm sure we did!) and then advised clients accordingly.
I have just looked at the IR website, and the manuals do indeed state as you quote below.
I will trace through my general gubbings acquired over the past few months to see if a have a printout of the illusive "change(s)".
In the meantime, it is also worth noting how the text continues following your extract in that...
"If, as may happen with a small company, such entries are not made until the annual audit, and this takes place after the end of the accounting period in which the directors resolved that an interim dividend be paid, then the 'due and payable' date is in the later rather than the earlier accounting period."

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29th Aug 2003 13:50

Still can't see the difference
We are no longer concerned with the original question about the date on which an interim as opposed to a final dividend becomes taxable.

That question is settled on the principles of the Potel case, as explained in the earlier postings on this thread.

The new question is whether crediting dividends (interim or final) to a director's loan account constitutes constructive payment such that it clears a prior overdrawn balance.

This would be relevant, for example, where the overdrawn account created an exposure under s419.

Does it make a difference whether it is a final or an interim dividend that is credited to the loan account?

It is not disputed that an important difference between an interim and a final dividend is that the shareholder can sue for the latter but not the former because a legally binding oblgation is established in that case.

But how does this fact impact the question we are now concerned with? The dividend - whether interim or final - has been credited to an overdrawn loan account. That, surely, implies, in both cases, that the shareholder no longer owes the company the overdrawn amount.

In other words there has been constructive repayment of the overdrawn balance on the date the interim or final dividend is credited to the loan account. So the s419 exposure is eliminated whether it is an interim or a final dividend that is credited.

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26th Aug 2003 13:37

Constructive payment
There is more than one view on this. The better view is that interim dividends are taxable when they come under the "dominion and control" of the shareholder - ie when he can draw freely on the related funds.

In the case of interim dividends being credited to a director's loan account, the director will be able to draw on that account from the time the credit entry is made. Hence the dividend is under his "dominion and control" from that time and is therefore taxable at the time the credit entry is made.

In the vernacular, there is constuctive payment of the dividend at the time it is credited to the director's loan account. And the dividend is taxable at the time it is constructively paid.

The different rule for final dividends is that they are taxable as and when they are declared (unless they are declared payable at a future date which then determines the tax date).

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By Anonymous
26th Aug 2003 14:13

IR Manuals
Notwithstanding John's fine comments, I believe that the article your read will have been written following the removal of text from the Inland Revenue's manuals stating that they will treat an interim dividend as being paid upon the date that it was credited to the loan account. This was removed in the early part of this year and was not publicised, leading many to believe (including me) that this is one way in which they will target the legitimate tax planning of a shareholder/director minimising salary and exploiting dividends where company profits decree this to be sensible.

To save the legal arguments that could follow, I have been advising that unless cash is to be taken then final dividends, rather than interims, should be used.

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28th Aug 2003 15:59

Thank you John
I used the terms 'interim' and 'final' in inverted commas as I meant to imply their customary usage, rather than technical meaning - thank you for the clarification.

There have been several other threads recently regarding the tax consequences of paying dividends approved by the board (rather than by the members) through directors' current accounts, instead of paying by cash transfer. It was pointed out that this is often done to clear an overdrawn balance but may now come under attack from the Revenue, who can argue that these dividends cannot be treated as having been paid.

It appears from this thread that a resolution by the members circumvents this problem. It will be important to get the paperwork right but does anyone agree that this seems to solve the problem?

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