Is it legal to distribute / pay dividends this way?

Is it legal to distribute / pay dividends this way

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Hello,

The company's net income in 2015 was £50,000. Also, in 2015 the company purchased some assets in the amount of  £49,000 (fixed assets on the balance sheet). So the balance sheet as at December 31 2015 is something like this:

Fixed assets: £49,000 
Bank and Cash: £1,000 
......
Total assets less liabilities: £50,000
.......
Equity:  
Current year profit and loss: £50,000 
.......

In January 2016, there was not enough cash in the bank to pay / distribute dividends for 2015. In February 2016, however, the company earned another £70,000 and decided to pay £40,000 dividends for 2015, since there was enough cash in the bank this time. Is it legal? 

Thank you.

 

Replies (5)

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By johngroganjga
23rd Oct 2016 12:30

You say that the company had retained profits of £50,000 at the end of 2015, and has continued to make profits in 2016. If you are sure that that is the case, why are you in any doubt that a dividend of £40,000 can be paid lawfully?

However, your balance sheet at 31 December 2015 doesn't look right. Why is there no tax provision?

Thanks (1)
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By Adam12345
23rd Oct 2016 12:43

AIA will reduce the profits to £1,000 if qualifying, so tax liability will me minimal, however, no depreciation charge, which will reduce retained profits.

You shouldn't really, as this will create a liability in the Dec 2015 accounts (which to satisfy the conditions needs to be an obligation), and a retrospective dividend was certainly not an obligation for the company at 31/12/2015.

Why can't you just declare the dividend in February 2016, it will fall in the same tax year for the individual receiving the dividend as if it were declared on 31/12/2015.

Thanks (2)
Replying to Adam12345:
By johngroganjga
23rd Oct 2016 13:28

Adam12345 wrote:

AIA will reduce the profits to £1,000 if qualifying, so tax liability will me minimal, however, no depreciation charge, which will reduce retained profits.

You shouldn't really, as this will create a liability in the Dec 2015 accounts (which to satisfy the conditions needs to be an obligation), and a retrospective dividend was certainly not an obligation for the company at 31/12/2015.

Why can't you just declare the dividend in February 2016, it will fall in the same tax year for the individual receiving the dividend as if it were declared on 31/12/2015.

You are forgetting about deferred tax.

And you are getting mixed up about the direction in which time runs. It runs forwards not backwards. So the reason why a dividend can't be declared in February 2016 is that that is a time which has already passed, not one which is yet to come.

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Replying to johngroganjga:
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By Adam12345
23rd Oct 2016 13:43

The way I read it is that £40,000 was paid in February 2016 - the issue lies with whether to include the dividend in the Dec 2015 accounts, or on the payment date... February 2016...

This sounds like a micro entity to me, and therefore no deferred tax necessary.

Thanks (2)
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By Mr_awol
24th Oct 2016 09:25

Deferred tax might not be necessary - but depreciation might bring 2015 profits down a bit.

In any case, going by the OP, this is a February 2016 dividend - but the number of clients (and indeed accountants) who would stick this in 2015 is probably quite high.

Thanks (2)