We act for a company director in regards to his personal tax only.
He has just sent me over copies of his company accounts which are prepared by another firm and importantly have already been filed to Companies House and HMRC.
Because I knew of the company's history I asked a simple question "were there sufficient reserves to have paid dividends from then?". The reply "yes the balance sheet was about £170,000." "Yes, but you have share capital of £240,000" says I.
Turns out the accountant let the accounts go in without a murmer saying that the dividends can be paid out of share capital which of course they cannot.
My question is, other than what the hell is this other accountant doing running a practice, what in practice is likely to happen and, from my point of view, are we ok to submit the directors personal tax return showing dividends when I know the company accounts show that the dividends are technically illegal?
Replies (5)
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playing devils advocate
how do you know that the company has not made a profit until hit by a one off bad debt of £70k after the dividends were paid ? With this sort of thing I generally do not second guess or ring bells merely warn the client in writing of the position in law. Namely that if the dividends did turn out to be illegal then section 847 CA2006 may apply and also HMRC may seek to invoke the old overdrawn loan account argument. In the interim the presumptive assertion is that the dividedns stand so enter them on the tax returns.
your example is not the only one
I am just taking on a client where the outgoing accountant has produced draft accounts with a £45k dividend which produces a £12k deficit.
And it gets better. There is a 15% minority but 100% of the dividend has been credited to the DLA to clear the balance.
And it gets even better. The majority shareholders' tax returns (which he has also prepared) only include 85% of the dividend included in the accounts.
Their website says that the firm is fully qualified with the xxxx - but I guess the partners aren't.
the implications
of an illegal dividend are often misunderstood. It does not mean that they do not exist or are somehow cancelled merely that if the recipient knew at the time paid that they were illegal then they are liable to repay them. QED until such time as that is proven and happens they exist.
Yes did have HMRC trying this one once and they backed down when confronted by this self same argument. They tend to be more of a pain when trying to invoke settlement rules when dividends are waived etc.
Yes HMRC do pick up on UV divs
even if not always. We have had a couple of cases where insufficient distributable profits to cover the divs declared which were picked up by HMRC, arguing a s.455 position, by reason of the shareholder funds deficit. I think with an interim div where you have mment a/cs or similar info to show that at that time reasonable to assess that should be sufficient funds to cover, it is hard for HMRC to argue the divs were ultra vires, but of course that position not really tenable with final divs or if in negative funds position from the outset or if size of div declared gave no likelihood of being sufficient distributable funds to cover. Sums then repayable by participator to co, so pot s.455 CTA10 liabs.
If co has an SPA , can do a share reduction to generate funds to distribute, but isn't of course retrospective.