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Labelling dividends/salary on bank transactions?

Labelling dividends/salary on bank transactions?

Hello

My client has historically not labelled the transactions between himself and the company bank account (he has a Ltd company and he is the only employee/shareholder), taking money 'willy nilly'.

At the end of the year he takes the basis salary to keep below the thresholds and deems the rest to be dividend or allocates against the directors current account, as he has invested a bit of money in the company. 

I have a feeling that the revenue may frown upon such flexibility and think I have read or heard somewhere that the dividends and salary should be clearly labelled. My concern is that the revenue could deem all withdrawals as salary???

I know there also arises the issue of dividend vouchers in this situation.

Can someone please put me out of my misery?

Thanks in advance

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22nd Jun 2012 18:16

To be correct, dividends and salary should be paid as separate transactions from the bank account and clearly labelled as such in the bank statement and company cashbook. All dividends should be supported by a board minute where the dividend is declared, and tax vouchers issued to each shareholder.  If these requirements are not operated, HMRC could well declare the full amount of drawings as salary.

Dividend paperwork should not be backdated, but I am not sure what checks HMRC have in place to confirm that it has been done on the correct date and not at the end of the year. 

I always stress to clients the importance of keeping correct paperwork throughout the year for dividends, as well as the directors having an idea of what the level of distributable profit in the company is before the dividend is declared, to ensure that the dividend is not illegal.

I also tell clients that they should not take money out of the company willy nilly - my clients pay themselves a monthly salary, and usually monthly dividends based on a simple assessment of available profit at the dividend date.

 

Edited to add - my understanding is that it is fine to withdraw money to offset against a credit balance in the directors current account without any required paperwork or tax implications.

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22nd Jun 2012 18:32

ahem

It sounds to me like the company owes him quite a bit of money from his initial investment.  if so the withdrawals are a repayment of the interest-free loan he's given his company.

Salary postings should tie in the the P60s.  Dividend postings should tie into the tax voucher amounts and dates.  Given that, I can't see any basis for an argument by HMRC that any transactions other than the salary postings are salary.

 

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22nd Jun 2012 19:02

Surely they might query transactions which exceeded the interest free loan amount, which were not stated as dividends on the bank statement, and which did not have dividend vouchers and a board minute declaring the dividend at the time when the transaction was made?

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23rd Jun 2012 11:34

There are three types of clients
The good guys who give themselves a separate payment of £620 or £624 a month, which is clearly the maximum salary that can be paid without PAYE deductions whether it is described as salary or not, and who always tell you when they want to pay themselves a dividend so that you can prepare the directors' resolution and divi voucher.The not so good guys who give themselves a separate payment of £620 or £624 a month, but who draw extra amounts without telling you.  The only problem here is that no dividend paperwork is raised at the time, but you can cover this by passing a single resolution when the accounts are prepared to confirm that the extra amounts paid during the year were dividends, which is not the same as backdating the paperwork.The other ones who do the same as your particular client, except that I am not sure if "At the end of the year he takes the basis salary to keep below the thresholds" means that having drawn amounts during the year, he then pays himself £7,400 odd on 31st March, in which case, he almost qualifies as a not so good guy because it is clearly intended as salary, or if he treats £7,400 odd of his drawings during the year as salary.  In the latter case, you have a potential problem.

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25th Jun 2012 07:50

start of year minutes/resolutions

As I understand it, HMRC do/have tried to challenge amounts drawn willy nilly during the year where specific dividends/salary are not clearly stated as such.

However, if at the start of the year, it is clearly documented that the company will pay Mr X £624/month as salary and that this will be credited to his loan account monthly and he will draw funds on account of that as he sees fit, and that any dividend paperwork doesn't refer to the dividends being paid but instead being credited to a loan account in the company and they too will be drawn as and when the director/shareholder deems appropriate, then the problem can be circumvented.

Hope that helps, I confess to have never had the detailed theory as stated above discussed and agreed with an inspector on a specific point/case but I have had an inspector review a Directors loan account with salary and dividends credited accordingly (qtrly in this case) and no questions were asked about the miriad of debit entries.

May have been a lucky day though.....

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By 2910pl
29th Jun 2012 13:08

Salary/dividends and PAYE

I recently attended a seminar and the presenter mentioned a case called P A Holdings.

In this case the Court of Appeal made a decision which seemed to state that amounts paid weekly/monthly as dividends should be treated as salary with tax and NIC being due on them in certain circumstances. The presenter told us to watch this space. I am dreading going to the next seminar to see what has transpired. Has anyone else heard of this case?

 

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mrme89
29th Jun 2012 13:34

PA Holdings

I've heard of the case and read it. It's somewhat more complicated than that lined above and involved the use of employee benefit trusts to avoid tax and NI. I think the outcome was that tax didn't apply but that NI did although I'm not sure if it was appealed.

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29th Jun 2012 13:45

What you need is practical help

The first answer is spot on the legal position. But practically what do HMRC do

They ask for a copy of the DLA and then ask for copies of the P60 dividend vouchers justifying the cr balances on the DLA, If you just do one div at the end of the year, you may be o/d part way through and you get caught for p11d benefit if you dont add interest.

 

We have 2000 clients and been going 10 years...how many times has HMRC asked for this,,,,twice and that was before the recent 30.000 redundancies. or the proposed 10,000.. Both were part of NMW queries from disgruntled staff.....

 

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29th Jun 2012 16:19

RTI

HMRC will have much more scope to challenge timings etc, at least of salary/remuneration after 6.4.13 - when credits to DLA that are to be treated as salary will have to be accompanied by an RTI filing - so no  credits to Director Loan a/c raised around P35 time in future.

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