Accruing illegal dividends
Owner-managed consultancy business, sole shareholder, company is £1k insolvent. No creditors whatsoever, other than my fees and a £2k directors loan account in credit!
Director has taken a £7k salary during the year and has no other income, he wants to issue himself a £25k dividend in order to make use of his personal tax bands this year, the dividend will simply be credited to his directors loan account and drawn down in future years when the company starts making some money.
I've briefed him on the fact that it would be illegal dividends and that should the company go into liquidation in future then he would have to repay the dividend, however he now knows the risks and to be honest the business will never go into liquidation, it's simply a consultancy business just outside of IR35 territory.
As far as I'm concerned I feel that I've covered my back with regards to giving advice, which will also be given in writing.
Can HMRC object to this? The dividend will one day be paid. Would welcome some thoughts on the practicalities of this please. And also does anyone else put a note in the accounts stating that an illegal dividend has been issued or is that considered overkill? No banks or suppliers will be relying on these accounts so a note doesn't really concern the client.
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