interim dividends

interim dividends

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My client is  a one man limited company with accumulated reserves.

He has withdrawn funds monthly at an irregular rate. At all times during the year there have been sufficient profits to cover the withdrawals. Accounting records are produced after the yearend.

HMRC are claiming he owes tax on beneficial loan interest as the average outstanding loan balance has been in excess of £5,000 - there is no documentation to show that dividends have been credited to his account. HMRC do not dispute that sufficient reserves were available for dividends to have been legally paid.

My client is argueing that he knew sufficient funds were available every month and that he issued an interim dividend at the end of each month sufficient to clear the balance. Paperwork was not produced at the time but he instructed his accountant to produce dividend vouchers to reflect the monthly nature of the payments when the accounts were drawn up some months after the yearend.

The questions are -

can a sole director and sole shareholder effectively claim an appropriate resolution to issue an interim dividend has been made simply by thinking about it? 

can documentation re dividend vouchers legitimately be produced subsequently simply to document the fact that an interim dividend was in fact declared?

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Teignmouth
By Paul Scholes
19th Jul 2011 14:42

May seem daft but.....

your client should have produced a minute each month (director's is fine) to record firstly that the company had sufficient funds and secondly to approve the payment of the dividend.  The voucher is not the important bit and many companies now only issue a summary version every 5 April.

I would also say that unless there were enough undrawn profits at the end of the previous year to cover the drawings for the current year, it's pushing it a bit to say that he knew there was enough in the kitty to pay a dividend and, if nothing else, preparing books after the year end goes against company law.

It may seem daft to have to do one piece of paper a month but the counter argument is that this sort of thing comes with having a Ltd Company.  It is actually so easy to do and you can scribble on a piece of scrap paper, turnover, less expenses, less 21% to give you available for divs, so, given the risks of not doing it, why would you not do so?

This topic raises its head regularly on AcWeb and I know others take an opposing view but writing a minute today for a dividend that was paid over a year ago is waste paper and regardless of the ins & outs of Company Law, HMRC will laugh and are perfectly entitled to treat the drawings as loans leaving the director to pay them off months later by way of minuted dividend.

Has any of this been put to the last accountant?  Strictly anyone becoming a director should find out what it means and what responsibilities attach to the role but, understandably, many will rely on their accountant to advise them.

 

 

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By cfield
22nd Jul 2011 00:19

Just accrue interest

Best thing to do here is accrue interest on a daily basis at 4% (the official rate for the last tax year) and debit it to the loan account on 5th April. That way no taxable benefit arises so no tax or class 1A NI will be incurred. No need for the loan to go on a P11D either. The only downside is that the company will pay corporation tax on the interest but better than a BIK.

The other issue you may run into is s455 tax on a participator loan, so make sure the loan a/c is cleared within 9 months of the year end. It will still need to go on a CT600A but no tax will be payable. Don't forget the Directors Transactions note in the statutory accounts either.

On a more general note, monthly dividends are frowned on by HMRC, especially if they are always for the same amount. Why take the chance when quarterly divs are just as easy and less risky? The £5k exemption should cover any shortfall over 2 months and any shortfall that does arise would have to exceed one month (from the 6th to the 5th) before a tax liability arises (unless HMRC insist on the exact method).

Strictly speaking there should also be interim accounts to prove that sufficient distributable reserves existed (nothing special, just a P&L and Balance Sheet) and the director must consider whether the company is a going concern (otherwise any subsequent losses that should have been foreseen may invalidate the dividend).

As for record keeping, best for your client to send you an e-mail notifying you of the dividend and requesting documentation and book-keeping entries. I always e-mail my clients a memo for them to enter the amount/date (as recommended by me), sign it and scan it back. That way there is contemperaneous evidence that it was all done and dusted at the time, rather than back-dated.

Chris

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