Are Dividends Minutes Compulsory

Are Dividends Minutes Compulsory

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I have been asked by the authorities to produce minutes of Director's meetings to approve payments of dividends. Is it absolutely legally neccesary to keep formal minutes for every payment of dividends for a very small company with many dividends payments.
Ken Jolliffe

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By AnonymousUser
14th Nov 2005 11:41

It ain't that difficult

Having worked in small practice for 19 of my 28 years in the profession I have a lot of experience of how small businessmen/women think and act. Their aversion to paperwork is unbelievable unless you have worked among them. However, that is how I make a living; ie by helping them through the necessary paperwork. It has been easy to convince all of my incorporated clients to keep a ring binder of dividend authorising minutes with copies of vouchers attached to the minutes. I set it up for them with blank documents on Word (ie blank as to dates and amounts - I prepopulate the things as much as I can) and it works. Telling them the consequences of getting it wrong is quite a good incentive.

I fully appreciate the technical arguments put forward below; that we could win an argument in the event of a challenge because the law says one thing and the Revenue another. I am not in business to take unnecessary risks, however.

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By NeilW
14th Nov 2005 12:07

Vouchers
While I'm on the subject, why do you need dividend vouchers? A waste of paper as far as I can see.

Since The Income and Corporation Taxes (Electronic Certificates of Deduction of Tax and Tax Credit) Regulations 2003 came into force, surely you can just send yourself an email.

NeilW

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By NeilW
13th Nov 2005 18:03

A better way.
I'm just trying to find a way that would allow clients to do what they would prefer to do, ie operate much as they did before they incorporated with as little change as possible. Clients don't want to be signing reams of paperwork every two minutes, neither do they want to build up a credit directors loan account first (which is the other easy way of dealing with the issue).

Now right or wrong, that's what they want to do, and the practice that can offer them a mechanism to do that will have a competitive advantage.

I have the greatest respect for the arguments put forward by both Martin and John, and I agree in many ways with their sentiments. However clients are clients and some of them won't be told.

So as pure devil's advocate, I'm going to suggest that the long winded way normally perpetuated is based on nothing more than "that's how it's always been done". I suggest that there is a better and simpler way to operate that ensures that distributions are made within company law.

So if the company makes a payment to the individaul, it is, as a matter of fact and law, some kind of payment AT THE TIME IT IS MADE, and cannot be classified as "drawings" or "don't know what it is I'll decide later" - it is not factual or legal.

What law, or case, requires dividends to be determined at the time? Why can't it be resolved in a single meeting, beforehand, that any payments by the company to shareholders are properly consituted interim dividends under the Articles of the company unless they are described otherwise? That's one entry in the minute book and the job is done. It could be done when the company is formed, or even included in the articles.

I have yet to see an argument based on the law that says that you can't set a company constitution that defaults to dividend payments, or that stops you from minuting a single director meeting towards the end of the accounting period that confirms the interim dividends paid and the dates on which they were paid - assuming the articles allow it. Both appear to me to be lawful, and a lot less paperwork which is good for everybody - particularly book-shy clients.

HMRC state at para 26 of http://www.hmrc.gov.uk/manuals/ct123manual/ct2007b.htm

"The question of whether a dividend is unlawful or not is not a tax matter. It is rather the application of company law to the particular facts, and the tax consequences flow from those facts."

So why not set the company constitution up to reduce the paperwork in the first place?

There just has to be a better way.

NeilW


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By martinfoley07
13th Nov 2005 21:49

Yes but.......!!!!!!
Neil
You say that the client wishes to
"operate much as they did before they incorporated"...

But, they have chosen to change their legal status and method of business operation by the very act of incorporating. Surely you don't have clients that you cannot persuade of this simple (and it is simple) fact? And that they need to take simple (and they are simple)precautions to preserve the tax benefits of their actions?

I agree that any means to make life simpler for business (of any size, not just small) must be a good idea.
I am unconvinced your suggested alternative solution is easier and more flexible than simply filling in two simple templates for a dividend ("reams of paper" is just not true). Your solution seems to involve changing the company constitution to create a system for making all payments to shareholders dividends "unless declared otherwise"- but that the opting out decision or "declaration" still needs to be made at the time of payment (or are you suggesting it is made later!!!). And in practice is surely going to cause as many problems to those clients who refuse to have any care over what they do as current situation. The first "divi" they pay themselves under that new default clause probably has 50/50 chance of being "illegal" if they are short of money that month!! Then Mr will "draw" a divi to his personal account, and forget Mrs. Then........

Surely it is both safer AND easier to treat such monies as DLA rather than set up a legal default to divis?

By all means set up a monthly or quarterly "default" divi to cut down on the "reams" of paper (which don't need to be printed off if you wish to save the rain forests) - approved in advance, subject to availability of distributable profits etc - again easy to do, and about 50% of my clients do already.

As for past actions, I guess we all await the first case before the courts to see which view they take!! (although could speculate it won't get past general commissioners - after all, we agree it is "simply" a question of establishing the "fact" of what the payment represents).

In the meantime, I think it's easier to get my clients to make a one minute entry for a divi when appropriate, than to change their company constitution and still have to check that each payment is appropriately dealt with, and does not need rescinding, reversing, reneging etc!

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By martinfoley07
11th Nov 2005 18:46

...yes, Neil,....
...in answer to your question does anyone know of any bunfights - 2 that I know of personally. You'll be pleased (or I am!!) they were not my clients when they had the bunfights. Worse, they both lost - now, whether they should have lost is extremely moot at best (and neither went to formal appeal).

But why are people prepared to accept the time consuming aggro, let alone the risk of losing, when the solution is so simple?
(there is, as you rightly say, no magic or mystery to the paperwork whatever).

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By User deleted
12th Nov 2005 11:52

vouchers and minutes
Does anyone have a template of what the vouchers and minutes should look like. There is so much discussion about this point that I would like to know if I am doing this right.

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By martinfoley07
12th Nov 2005 21:15

...for templates.....
(i) for divi voucher, just use same format as any plc divi voucher for basic format, info and boxes etc
(ii) for minutes, as Neil implies, it really is as simple as following your nose - stating what, where and when as regards directors having met (and meetings can be by phone) and agreed x divis (usually you'll want them to be interims, but that's another story) for the shareholders, representing y divi per share etc.

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By NeilW
13th Nov 2005 09:40

Dividend straw man
I put up a straw man in another thread that may be better here:

Where in Company/Tax Law does it say that you can't decide that money drawn is dividends - even retrospectively?

An interim dividend can be rescinded, paid, recovered, extended and deleted as the directors see fit, if the articles allow. The law doesn't ban retrospectivity within an accounting period. I see no reason at present why drawings can't equal interim dividend according to the law.

As far as I can work out, if you have a financial year end directors' meeting that is minuted as saying "The directors confirm that the interim dividends declared and the dates they were declared are as follows. The directors confirm that the necessary profit existed at the time, and that where necessary interim accounts were drafted to verify this.", then that will do the trick.

In other words is there a way of drafting the articles and operating the company that reduces the paper chase, allowing an incorporated sole trader to continue to draw dividends as and when he wants even if he doesn't have a DLA in credit?

NeilW

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By AnonymousUser
13th Nov 2005 15:36

But...

...do we want to encourage our clients to 'do tricks' as the previous respondent suggests?

As other respondents have noted, it is easy enough to do these things properly and according to the book. There is nothing magical or mysterious about directors resolving to pay interim dividends.

For example:

Minutes of a meeting of the directors held on Sunday 13 November 2005 at 5 Acacia Avenue at 3.45 pm.

Present: Mr A Smith; Mrs B Smith.

The directors considered the latest management accounts for the period ending 30 September 2005. The directors noted that the company was continuing to trade successfully and that distributable profits were approximately £30,000, after providing for depreciation, corporation tax and contingencies, and after deducting the 1st interim dividend for the current year of £15,000 paid on 13 August 2005. The directors also noted that available cash resources were approximately £35,000.

Accordingly, the directors considered it appropriate and RESOLVED: to pay a 2nd interim dividend for the year ended 31 March 2006 of £150.00 per Ordinary Share amounting in total to £15,000. Such dividend to be paid on or before 21 November 2005 to shareholders of record on 13 November 2005.

Signed

A Smith - Chairman

Agreed, all that is a bit of a mouthful, but the pro-froma can be used again and again in the future by just changing the dates and amounts. It can be adapted for telephone meetings or as a written resolution that just needs to be signed by the directors without the need for a meeting at all.

It is surely not too much to ask of clients who have incorporated that they should prepare management accounts and consider the company's profitability and cash position at least quarterly (and preferably monthly). It is then only slightly more burdensome for them to authorise, by resolution in advance, payment of interim dividends in accordance with the above example.

Dividend vouchers

All that is required, for each shareholder, is the following, preferably printed out on company-headed notepaper.

Dividend voucher in respect of the 2nd interim dividend of the Company for the year ended 31 March 2006 authorised by directors' resolution on 13 November 2005 to be paid on 21 November 2005 to shareholders of record on 13 November 2005.

Name of shareholder:
Number of Ordinary Shares held:
Dividend per Ordinary Share:
Dividend paid to shareholder:
Tax credit:

Signed and sealed on behalf of the Company by:


Secretary
14 November 2005

Again, once the pro-forma is in place, it can be used again and again in the future just by changing the dates and the amounts.

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By martinfoley07
13th Nov 2005 14:20

when is something nothing.
Let's take a 100% shareholder/sole director company. It is (presumably!) accepted the shareholder/director and company are separate legal persons.

So if the company makes a payment to the individaul, it is, as a matter of fact and law, some kind of payment AT THE TIME IT IS MADE, and cannot be classified as "drawings" or "don't know what it is I'll decide later" - it is not factual or legal. The payment wasn't in limbo, and wasn't "drawings".

So, the question inevitably arises - what type of payment was it "as a matter of fact" at the time. (The fact that you may legally be able to make later transactions is simply not pertinent to this - by all means make later transactions which are perfectly legal).

Basically there are three main (with plenty of sub-variations) types of payment it can be as a matter of fact:
(i) dividend
(ii) making of a loan, or repayment of a loan
(iii) salary, bonus,etc etc

In many cases, it is most tax beneficial for it to be a dividend, and least benficial to be salary/bonus etc. So naturally the taxpayer says its (i) (prompted by his adviser no doubt). HMRC will often argue it is (iii) (prompted by the highest tax take, no doubt). IMHO, if there is no clear objective or corroborative evidence, the most "likely" default is (ii) - but it is not me who will decide.

But the whole point is, this is a completely NEEDLESS debate or argument. As a matter of fact, the payment WAS something (not nothing) AT THE TIME it was paid. Neil can continue to risk bunfights and difficulties so long as his clients can't be a***d to evidence or document what the payments were. I think it is perfectly possible for HMRC to decide to challenge lots of minor payments which have no documentation (albeit the fact in the original posting that the cheque stub says "dividend" is of course an excellent start from taxpayers viewpoint). I think there is a risk the Commissioners or judge may decide against the taxpayer, on the evidence, that the payments were indeed dividends. They will enquire as to best and/or normal practice for dividend payments in companies in coming to their decision as to the "facts" they are being asked to determine.

If at the time it is NOT clear whether or not the shareholder wants dividends, treat it as (ii) and declare the dividend at the appropriate time.

Neil seems to think those advocating a clear path are angels dancing on pinheads. I would argue the reverse - it is those who do not clarify the facts at the time of the transaction, and then scrabble around afterwards, who are dancing.
And is it really easier to start changing Articles of assocn and then having recisions, reintstatements, etc etc than using a bog standard template on the client or advisers screen that they simply whip off whenever needed? I would not have thought so.

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By AnonymousUser
11th Nov 2005 11:13
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By martinfoley07
11th Nov 2005 13:11

..so many small companies (and their advisers?)......
...are STILL taking no care over incorporating and its implications, but just carrying on as if they can take their sole trade/partner drawings, and then "rectify" the situation by saying it was dividends, honest guv.

Well, no-one can claim they have not been warned this will end in time consuming bun-fights with HMRC, not all of which are going to be won by the taxpayer.

This is a bit like the "no receipts" debate, only much worse. At least there can be a bona fide reason sometimes for not having receipts. There is no reason or excuse (other than lack of due care and attention) for not getting dividend payments and paperwork (including minutes and dividend vouchers) properly organised and documented so they can't be attacked by HMRC in this manner.

And yes, HMRC WILL attack them in this manner, and NO, this is not Government red tape and bureaucracy - the owner decided to incorporate for whatever reasons, possibly including tax savings. How are you evidencing to HMRC that these "many small payments for this very small company" are dividends - oh, because the tax bill is much lower if I say they are - oh, well that's alright, then.

Long (non) answer to short question? I'm not a corporate lawyer, so won't even try to answer exact question - you may need lawweb not accountweb for definitive answer to "absolutely legally necessary..".
But yet another warning for small companies and advisers that a small stitch in time will save nine or more - HMRC do attack and find some soft targets in these types of area.

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By NeilW
11th Nov 2005 15:15

Dividend bun fights
Anybody had one yet with HMRC over deficient paperwork?

I agree that paperwork ought to be done at the time, and that a procedure should be followed simply to keep HMRC quiet.

However, if the directors state that they have exercised their power under the articles to declare a dividend, and the accounts support it then it is a dividend. It then falls to be taxed under s383 ITTOIA 2005 when paid. (Remember that an interim dividend can be rescinded).

The only requirement in the companies acts are to consult the 'relevant items' in the 'relevant accounts' (section 270, Companies Act 1985). If the previous year's annual accounts don't have sufficient distributable reserves, then 'interim accounts' should be consulted.

Also remember that 'formal minutes' can just be an Excel spreadsheet with a signature box against each line for the chairman to sign off the dividends. I don't believe there are prescribed formats for minutes. Just a requirement that permanent records are kept and approved by the chairman.

NeilW

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