Company dividends

Company dividends

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I am not a chartered accountant, and deal mainly with sole traders and partnerships.  I do have one limited company which proves to be an absolute pain each year.  The accounts aren't a problem - it's the form filling in!  I would appreciate knowing how to treat dividends.  My client took a considerable sum over the director salary in the last financial year and obviously it is advantageous to treat this as dividends.  What do I do next?  I believe it has to be declared to HMRC as a company dividend paid and also on client's self assessment form (that's no problem).  Do I need to complete a form (I think it's 101)?  A question on that form asks under what circumstances the dividend has been paid - no idea how to answer this one.

Sorry if I sound like a complete amateur, but I have to admit that I am when it comes to limited companies.  Any help greatly appreciated.

Replies (34)

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By andy.partridge
27th Jan 2015 09:26

It might be

It might well be advantageous to treat the amount as dividends, but your first task is to determine what the sum really was.

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By Tim Vane
27th Jan 2015 09:54

I agree with Andy. "Taking a

I agree with Andy. "Taking a considerable sum" is not receiving a dividend. Without any paperwork provided at the time the money was taken then it is at best a directors loan.

But for heavens sake stop mucking about with stuff which you admit you are not competent to deal with before you cost your client a lot of money. Tell your client to appoint an accountant or you are doing him a gross disservice.

 

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By johngroganjga
27th Jan 2015 10:16

I agree with the above observations that you need to establish the nature of the payments, but I shall proceed on the assumption that you are satisfied that they are dividends.

There is nothing difficult or complicated about accounting for dividends and there are no forms to fill in that would not be required to be filled in in any event.

In the company's accounts you just show the payments as dividends in the place provided for that purpose (in the movement on reserves note) and insofar as the dividend is paid to a related party you need to disclose the amount so paid in the related party transactions note.

And yes of course it's dividend income on the shareholder's personal tax return.

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Replying to penelope pitstop:
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By andy.partridge
27th Jan 2015 10:29

I wonder

johngroganjga wrote:
There is nothing difficult or complicated about accounting for dividends and there are no forms to fill in that would not be required to be filled in in any event..
I wonder if the OP is referring to meeting minutes and tax voucher?
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By johngroganjga
27th Jan 2015 10:34

Maybe, but his question is about the accounting and tax treatment once their character as dividends has been established. Minutes and dividends are relevant to establishing the character, but not to the accounting and tax treatment.

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RLI
By lionofludesch
27th Jan 2015 10:40

Honest

At least the guy's honest about his lack of knowledge.

Unlike some recent posters .......

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By andy.partridge
27th Jan 2015 10:45

Not quite

@ John - The OP says the accounts aren't a problem, it's the form filling. It is we who have questioned the character because the OP doesn't appear to have given it any thought.

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By johngroganjga
27th Jan 2015 11:08

Yes but as I have explained to him there is no form filling, just accounts and tax returns that would be required in any event.

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By Newbee Learner
27th Jan 2015 22:34

Paperwork is key
If the minutes etc are not in place, then it is not a properly declared dividend. HMRC would seek to treat a debits to the loan account until the dividend is properly voted.

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Replying to Moonbeam:
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By User deleted
27th Jan 2015 22:56

Paperwork is desirable

Newbee Learner wrote:
If the minutes etc are not in place, then it is not a properly declared dividend. HMRC would seek to treat a debits to the loan account until the dividend is properly voted.

HMRC unsuccessfully seek to do lots of things.

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Replying to Moonbeam:
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By Newbee Learner
27th Jan 2015 23:38

Quite true BKD
But experience has taught me that on this one they do succeed on more than one occasion :-) I.e supporting documents are needed to correctly vote a dividend

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Replying to Moonbeam:
By johngroganjga
28th Jan 2015 08:24

Minutes

Newbee Learner wrote:
If the minutes etc are not in place, then it is not a properly declared dividend.

It's not just about minutes.  It's about an accumulation of evidence, of which the minutes, if they exist, may be one component.

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Replying to Moonbeam:
By kenny achampong
28th Jan 2015 14:20

AGM

Newbee Learner wrote:
If the minutes etc are not in place, then it is not a properly declared dividend. HMRC would seek to treat a debits to the loan account until the dividend is properly voted.

Out of interest, if the client is the only director, what are the minutes of a meeting he had with himself going to say ?

 

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By Newbee Learner
28th Jan 2015 23:36

CTA article.
A clip from the CTA Student Magazine of August 2013 provides insight into what students were being advised. My reading of this is that minutes etc are required.

"The main issue with dividends arises with the legal side of the process. This is especially important where the company has no retained profits from earlier years. HMRC will expect there to be evidence of the company preparing accounts to demonstrate there are sufficient profits to support the dividend payment. This must be done every time a dividend is paid.
Furthermore, it is necessary to differentiate between an interim dividend and a final dividend. An interim can be approved by the directors but a final dividend must be approved by the shareholders.
HMRC will consider whether the relevant paperwork – minutes, dividend warrants etc - is in place to back up the dividend. If not they may well contend that this is a loan – probably with s455 implications ..."
Is the CTA advice wrong or misleading?

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By johngroganjga
29th Jan 2015 10:54

CTA advice is not wrong, but a bit simplistic and over the top.

As I said above, what is required is evidence that a given payment was intended to be a dividend and not something else.  The contemporaneous labelling of a cash book entry as a dividend payment would be a good start.  The reporting of a payment on the recipient's tax return as a dividend would also be very useful evidence that it was not a loan, especially if the recipient was paying higher rate tax on it.  Of course minutes and dividend vouchers are nice to have as well. But as Kenny has pointed out, what would minutes look like in a company with a sole shareholder who was also the sole director.

I do part company with the CTA on one point in the above extract - the idea that HMRC are concerned with whether a company has sufficient profits to support the dividend payment. I would not suggest for a moment that that is not a consideration of the utmost importance for the company paying the dividend.  I just mean that it's no business of HMRCs.

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By Garyjp23
29th Jan 2015 11:26

Dividends
If their are insufficient profits to cover dividends then dividend is illegal therefore hmrc might take an interest

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By User deleted
29th Jan 2015 11:49

@sosleepy

There is plenty of commentary on how HMRC will deal with illegal dividends.

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By JamesAnd
29th Jan 2015 11:49

I believe that as long as you are following procedures set out in it's Articles then you are ok - I think there were some model regulations issued by Companies House 3/4 years ago designed to help sole director/shareholder company's as it is obviously pointless making them sit round a boardroom to vote - if you can show HMRC that you are following CH and articles they will find it hard not to agree to it being a dividend even if no minutes. I think though you should still produce a voucher - as much for the individuals personal tax affairs than for dividend treatment.

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By sosleepy
29th Jan 2015 11:52

@BKD

But surely it would take a very sloppy set of circumstances to leave a situation where HMRC can do anything to change things around?

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By User deleted
29th Jan 2015 12:04

Sloppy, perhaps

But not as uncommon as you may think.

Without really wanting to reopen old arguments I'm going to anyway. Whatever you choose to call it - dividend, distribution, whatever - a payment of cash to a shareholder where there are insufficient profits cannot, by definition, be a distribution of profits to the extent of the deficiency. If it is not a distribution of profits then it must be something else. The discussion should be about what that "something else" is.

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By johngroganjga
29th Jan 2015 12:08

Surely the "something else"

Surely the "something else" is a so-called illegal dividend, on which tax is due in the same way as it is on all other dividends.  That is why the question of whether a given dividend is legal or not is none of HMRC's business.  

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By JamesAnd
29th Jan 2015 12:52

But if it is an illegal dividend surely to HMRC the "something else" would be a write back to DLA and assuming then sends o/d seek s.455? And probably interest and penalties?

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By johngroganjga
29th Jan 2015 13:19

Yes but that's not what HMRC do is it?  And why would there be penalties?  For declaring a loan as income?

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By JamesAnd
29th Jan 2015 13:49

I am saying interest and penalties depending on when the s.455 should have been paid if this means it would take the dla o/d in previous accounting period. And then beneficial loan/incorrect P11d's implications.

In the end drawings by a director ether have to be salary, dividends or loans. A dividend surely can't be taxed as a dividend if it is illegal just as I assume it cannot be treated as a dividend in the accounts.

I have seen HMRC do this (and I seem to remember being on a Mercia tax course a few years ago that referred to a tax case).

I also once had a client where they had no minutes. However, I was able to argue an oversight as regular dividends in the past that were minuted.

As I said before, if the company's articles don't say that there needs a vote then ok for no board minutes so HMRC couldn't then insist on them. The regulations I referred to earlier are the Companies (Model Articles) Regulations 2008 applying to companies incorporated after 30 Sept 2009.

In the end, as I think so sleepy is hinting at - why take the chance for the sake of a quick production of minutes etc on excel/word?

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By johngroganjga
29th Jan 2015 14:12

Firstly I have never heard of a case where HMRC tried to have a dividend treated as a loan solely on the grounds that it was illegal.

Secondly if they ever tried it I don't see how they could possibly win the argument.  For a start they would be on the opposite side of the whole accountancy profession on the question of how accountants should prepare companies' accounts.  I have little doubt that the courts would accept that the settled view of the accountancy profession - that illegal dividends should be accounted for as dividends notwithstanding their illegality - should prevail.

So HMRC would be left with trying to argue that S455 applied not only to loans but also to the cumulative total of a company's illegal dividends at each balance sheet date. Would they ever win such an argument?  I don't think so.  Would they ever try and run it?  I don't think so either.

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By User deleted
29th Jan 2015 14:31

Accounts and tax

I agree that the legality or otherwise of the dividend should not necessarily determine the accounting treatment. But we're concerned here about the tax treatment, which will depend on the circumstances. HMRC's views on this are quite clear, and supported by case law. I also believe that, as a matter of common sense, a payment cannot be considered to be a distribution of profits if there are no profits to distribute.

Would HMRC ever try and run with it? I think they would, because I have seen them do so. Would they ever win such an argument? I suspect that they would in the right (wrong) circumstances, though they didn't in our case (because we eventually persuaded them that there were in fact distributable reserves, so we don't know who would have won had that not been the case).

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By johngroganjga
29th Jan 2015 14:37

Interesting - so you mean that you think HMRC might win an argument that the tax treatment should be different from the accounting treatment.  But does there not have to be some statutory basis for such a divergence, and if so where is it here?

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By JamesAnd
29th Jan 2015 14:46

I have though John but can't remember them of the top of my head.

I also think there have been references in previous accountingweb strings on the same topic. I have had a quick look and for example, Jennifer Adams wrote an article in Jan 2011 nd Simon Sweetman in 2007.

I think though that HMRC try and attack if the dividend is knowingly paid illegally i.e at the time voted the shareholders knew their would not be sufficient reserves

 

 

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By TerryD
29th Jan 2015 14:54

My penn'orth

While I have little experience of HMRC's views on this subject, I do know thast s. 847 CA2006 says that if, at the time of the distribution, a member knew, or had reasonable grounds for believing, that the dividend was illegal, he is liable to repay it.

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By User deleted
29th Jan 2015 14:57

No divergence

The accounts can continue to show the payment as a dividend (even though, as in the case referred to, the transaction was void?) In any event, s455 makes no reference to accounts treatment - the question is simply whether or not the participator has incurred a debt due to the company, which in turn will depend on the circumstances.

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By johngroganjga
29th Jan 2015 15:02

Yes but is the payment has

Yes but if the payment has been accounted for as a dividend there is no debt!. That is the point.  

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By User deleted
29th Jan 2015 15:18

Why do you think ...

... that the accounting treatment has any bearing on the actual facts or how the courts may treat an ultra vires dividend? Read the case law.

I've nothing else to say on the matter.

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By johngroganjga
29th Jan 2015 15:24

Because if the creditor sought to collect the debt the creditor's accounting treatment is what the debtor would point to in support of his case that there was no debt.

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By JamesAnd
29th Jan 2015 15:42

My final comment also... whilst it is treated as a dividend in the accounts HMRC will argue in court that as the payment is an illegal dividend under company law and thus should either be salary or a loan.

Sometimes they have succeeded and sometimes failed. Success I believe, as mentioned above, is normally when the dividend has knowingly been paid illegally.

 

 

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