Dividends to loan account

Dividends to loan account

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Hello

One of our clients had minutes and dividend vouchers drawn up during the 31 March 2009 year end for a dividend to be credited to their loan account on 31 December 2008. The minutes were drawn up on 27 December 2008.

The bookkeeper was unaware of this and did not enter it onto sage (no cash was drawn and the Director did not make her aware)

When the accs were completed we noticed this and corrected the error.

The Revenue are currently investigating the company and have stated that "as the dividend was not entered into the books during the year to 31 March 2009, it should be included the date it was posted onto sage"

There is some uncertainty of the date it was put onto sage but I think it would have been done via a year end journal.

HMRC are now seeking s419 tax on the overdrawn DLA as at 31 March 2008

Has anyone encountered a similar problem?

Thanks in advance

Replies (15)

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By Christos K
14th Nov 2009 17:33

DLA - s419
If the loan is paid off within nine months of the end of the company's APE, then the company does not pay tax on the loan. However, you must include details of that loan on the CT600. For full details go to:-

http://www.hmrc.gov.uk/ct/managing/director-loan.htm

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By User deleted
14th Nov 2009 19:07

oh c'mon, perleease

"There is some uncertainty of the date it was put onto sage but I think it would have been done via a year end journal."  That's just baloney or incompetence.  What do you mean, you think it would have been done via a year end journal??!!  That's plain crummy.  Perhaps you don't want to tell HMRC or us an outright porky, so you go for a smidgeon of "some uncertainty".    

That said, you'll win if you stick to your guns (however pathetic the story appears - not to say the story is inaccurate for sure, as no-one except the client can possibly know for sure).    But.........

Whatever :

1.  If the divi documents were valid, and if the year end journals were done to reflect this, the date they are entered on sage would be irrelevant.  Facts would be,  that errors were made in the books.  

2.   But beware timelag in getting books corrected. 

3.   And beware being caught out on uttering forgeries.

Of course, all the above could be a scurrilous mistaken view on what really happened.  But the way you present the story hardly gives credence to that.

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By User deleted
15th Nov 2009 09:34

revenue talk rubbish

Directors do not have to tell their book-keepers everytime they draw a dividend so don't bother explaining about year end journals.

State the facts, a meeting was held dividends voted and recorded as having been credited to current account rather

than withdrawn in cash. Then tell the revenue to get loss.

I regard Sage as a bookkeeping tool and nothing else.

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By gboy1980
15th Nov 2009 11:38

What do the actual minutes say?

Check what the minutes say.

To cover this situation where they dont pass the info onto the bookkeeper, our board minutes prepared for clients always say.

The board decided to vote a dividend of X to all shareholders registered on dd/mm/yyyy, and is payable on dd/mm/yyyy.

In that way, the company legally owes the director the dividend as at the payment date, and if it is undrawn, then its becomes a debt due to them, even if it is not entered in the books at that date.

If the minutes do not mention a payment date, then I can potentially see where HMRCs argument is coming from. Simply voting a dividend prior to 31 December 2008 does not give them a right to receive that dividend at that date, so HMRC could argue that the payment date was the date it was entered into the books.

Another thing to watch. Did the loan account go further overdrawn from 1 April 2008 to 31 December 2008 and if so did the dividend voted cover this aswell. I have seen HMRC take up the point that the loan was repaid in full it say it was £10k overdrawn on 31 March 2008, £15k overdrawn on 30 December 2008 and you pay a dividend of £10k on 31 December 2008. In there view, the loan is still £5k overdrawn at 31 December 2008.

G

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By Steve Holloway
15th Nov 2009 14:19

Technically the Revenue are correct ...
as the relevant date is (per the BIM) 'when the dividend is entered in to the books of account'. However, I have never accepted this as when accountants prepare final accounts it is fairly natural that there will be a whole load of adjustments to be made ... do HMRC treat these items as never having occured as well? No they don't .. bookkeepers are not accountants and will not get it 100% correct and I would stick by your guns on this.

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By Malcolm Veall
16th Nov 2009 16:11

The Law

As I am sure you know, Steve, the BIM does not state the law but is what HMRC Officers look at to see what the law is.  The wording in the BIM would be more relevant, as a guide to the fact of when a dividend decision was made, if the dividend decision was not actually made, (and later documented in the minute).  The BIM wording made more sense when Company's records were recorded in paper book.  Surely they have not had IT experts examine the Sage datafile to determine the date the entry was made as opposed to the date attached to it?

I do think that some of the respondents here are too cynical, the OP does say that the minute was drawn up on 28th December, not that it was dated 28th December.

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By kenmoody
17th Nov 2009 11:34

I don't know if things have changed ...
... under CA 2006 but my understanding has always been that a final dividend is legally due and payable on the date it is declared or on the date specified in the resolution, in which case HMRC are wrong, whereas an interim dividend can only be paid it can never be a debt (because until it is paid it can be rescinded). Some would go so far as to say that an interim dividend can only be paid in cash (and that could be the case if the articles do not authorise a dividend in specie) but HMRC accept that a dividend may be paid by bookkeeping entry so that's not a point which needs to be argued. Some companies have elective resolutions in place so that they don't have AGMs in which case a dividend can declared by written resolution of the directors. I recall that the Company Law Reform Bill intended to give directors of private companies power to declare dividends without authorisation by the shareholders, but I don't know if that made it into the Act. However, again as I recall the CA doesn't talk about interim or final dividends, but if the directors are also the shareholders and you have minutes of a meeting of all the shareholders resolving to pay the dividend then while the required notices may not have been given etc , your argument must surely be that the dividend was legally due on 28 December 2008. and that is the date of payment for tax purposes.

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By User deleted
17th Nov 2009 11:41

Final vs interim?

A final may well be 'due and payable' on the date of the resolution. But that is a million miles away from 'due and paid'. So I don't see the relevance of the final vs interim distinction. The dividend is either paid or it is not - what does it matter what kind of dividend it is?

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By kenmoody
17th Nov 2009 12:27

The distinction is that
as at 28 December 2008 a debt is legally due and certainly for income tax purpose that is the date of payment. If an interim were declared there is no legally enforecable debt. It is paid when it is paid and while opinions may differ as to what constitutes 'payment' I would agree with HMRC that it would not have been paid until the book entries were made. We've had this argument before about what happens if the company's books consist only a spreadsheet but I don't think the point was resolved and I don't see the need to rake over that again.

So, if the DLA was overdrawn by £100k and on 28 December 2008 a final dividend of £100k had been declared payable, then at that point the amount legally due to the company is nil. It may be that the book-keeping entries have not been made but if no debt is legally outstanding at that date then it must have been repaid and I do not see what other construction could be placed on that. I'm playing Devil's advocate here a bit. I don't say you are in an enviable position and I don't say HMRC will like that argument, but as we all know if you give them a bit of flim-flam and throw in a few legal sounding phrases and maybe a case or two they'll sometime [***] off and hassle somebody else! That's all I'm saying really.

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By User deleted
17th Nov 2009 13:09

Hmmm

Still don't see the relevance of the taxpoint. Say I was hoping to clear DLA from proceeds of sale of chargeable asset? I may complete the sale today but not receive the proceeds for another month. Are you saying I could rely on the taxpoint of the CGT disposal as date of clearing DLA? Of course you're not. Just because tax becomes payable as a consequence of a taxable event does not mean that what is payable is paid.

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By Malcolm Veall
17th Nov 2009 13:22

Date of entry

The point, (that is an old chestnut but continues to be relevant because HMRC apparently keep trying to rely on it), is that HMRC are saying that an interim is only paid when the entry is made in the books.  This is ludicrous as it suggests, where two identical companies make identical dividend decisions and one writes up the double-entry ledger daily and one does it when they get round to it at the end of the month, that they have different dividend payment dates.

I always argue that the date the books are written up is only relevant when this is the only evidence of the date the directors decided to take a dividend, equivalent to the date the cheque was written if the interim dividend was only evidenced by withdrawl from the company bank.  I have yet to have an HMRC challenge to an ACTUAL dividend decision actually evidenced, eg by e-mail exchanges at the time of the decision.

 

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By kenmoody
17th Nov 2009 14:58

The tax point is relevant because
the income arises at the date it is legally due and payable, not when received or drawn. I am building this argument on the dividend being legally due on 28 December, but it's not totally clear if the paperwork supports that. If you were hoping to clear the DLA with the proceeds of sale of a property that would not affect the debt due to the company unless you were selling the property to the company. Here we are talking about an amount due by the company which offsets your indebtedness to the company.

Malcolm is of course right that book entries are not the only means of paying dividends, but by whatever means they are 'paid', whether in cash or in specie (which I think is what a bookkeeping entry amounts to)there is no 'payment' until you actually do it. There is legal precedent by the way that a bookkeeping entry may constitute payment and I think the HMRC guidance recognises this (Garforth v Newsmith Stainless Steel). I am perhaps labouring the point about interm v final dividends but this is the law guys (as I understand it). I didn't make it up! In the circumstances Malcolm describes I do think that the analysis is different depending upon whether you are talking about an interim dividend which may be authorised by the directors or a final dividend declared by the members in AGM. If the former the paperwork is worth tuppence because the directors may rescind that decision at any time until the dividend is paid, and if it is not paid by any other means that would be when it is booked provided that the director is unconditionally free to draw on this (see Garforth). You've got draw a line in the sand somewhere I mean you can't have the ghosts of dividends floating about in Limbo. They are either paid or they are not. There is no interim status. In Garforth it was vital that the director was free to draw on the money (it was bonuses in that case) so I wonder if you said in the declaration that the funds were free to be drawn that would assist maybe where there aren't any books as such. I suspect it wouldn't but we are going outside legal precedent here. I suspect that Malcolm hasn't had a dividend challenged in the circumstances he describes because HMRC are not experts on company law and in fact that is why you may yet succeed. We can agree to disagree on what constitues payment.

If it were the case that the dividend was legally due and payable on 28 December 2008 that's all that needs to be said. If that is the case it doesn't matter when the paperwork was drawn up. That would be my argument and I reckon that I could win that argument, partly because HMRC are not legal experts and so, depending on how you tell it, I think you could put a certain spin on it that would succeed.

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By kenmoody
18th Nov 2009 10:00

And surely ...
... subject to anything in CA 2006, the way forward would be to file elective resolutions to dispense with AGMs so that we wouldn't have to bother about interim v final dividends. Maybe I'm the only one who thinks this is important anyway but if a dividend is declared otherwise than by the members in AGM I'd have thought that by definition it's an interim, with the consequences I've described. I can't find anything in CA 2006 which gives directors power to declare dividends so I think that proposal must have been dropped though haven't time to look properly. Table A reg 102. says that the company may by ordinary resolution declare dividends .... but no dividend shall exceed the amount recommended by the directors. So, if you have a board minute proposing a dividend (assuming of course that the dividend is lawful i.e. sufficient reserves etc) and a written resolution signed by the shareholders, that should be sufficient, I would have thought, to make the dividend legally due and payable on the date of declaration unless some other date for payment is specified. That should avoid arguments regarding when the book entries were made and also the problem where there aren't any books as such. Indicator publish Essential Documents for Saving Tax which is only about £35 and which contains some draft minutes and written resolution, which could be adapted. So, in the end I am agreeing with Malcolm that if you get the paperwork right you should be OK. Need to also look what it says in the articles about dividends/resolutions etc.

I'm not an expert on company law - and I think common law comes into this as well - so I'm more than happy for someone to put me straight on this if they have a better idea.

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By Malcolm Veall
18th Nov 2009 10:05

I agree, (I think)

Ken,

Thank you for this, I think that you & I have done the same research since your previous posting.  What would be really nice would be if someone who specialised in Company Law could confirm.

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By kenmoody
18th Nov 2009 10:46

And thanks to you Malcolm ...
... as I am keen to nail this one too. I think that would work as far as I can tell but yes it would be great if a company law buff would confirm.

Out of interest, I was looking back in my papers and I found a thread back in Nov 2005, sorry I can't provide a link, where Rebecca picked up on the 'available to draw' aspect of Garforth and she says:

"I believe that if the minute states that the amounts are treated as now credited to the loan account and are available to draw that creates a payment even if the directors do not draw in full, provided that the loan account is in reality available to draw"

I don't know if she still stands by that and maybe there isn't an absolute answer but there are clearly steps you can take to arm yourself against this sort of hassle. It just has to be possible to crack this nut once and for all.

Regards K

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