Dividends can only be paid out of profit. Does this mean just current year profit OR does it mean the total balance on P&L must be in profit?
So if there is a profit in the current year BUT P&L overall is still in deficit because of previous year losses then a dividend should not be paid until all previous losses have been cleared?
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You cannot pay dividends of
You cannot pay dividends if the accumulated end balance is negative.....
A dividend can only be paid out of realised profits.
Accumulated profits
Mikeyban is correct, it's risky to pay dividends if the accumulated profit balance is negative as HMRC can claim it should have been a salary and demand NIC's that would have been paid on a salary plus penalties.
On the otherhand if the company is making a cumulative loss but has the cash to pay out dividends then surely there is a large directors loan balance thatcan be drawn down instead.
Not sure why the first response of so many people on this forum is to "ask an accountant" Your question doesn't state wether or not you are an accountant so it could be a perfectly legitimate question for Aweb.
Reason
That dividends can only be paid out of accumulated profits is a fairly basic principle of company accounting. If someone asks a question that shows lack of knowledge of a basic principle, it is not unreasonable to assume they are not an accountant (or if they are they should not be handling company accounts). Not sure why the first response of so many people on this forum is to "ask an accountant" Your question doesn't state wether or not you are an accountant so it could be a perfectly legitimate question for Aweb.
???
HMRC can claim it should have been a salary
I suppose that they could try, but if they did with any of my clients they'd be sent packing with their tails between their legs.
if the company is making a cumulative loss but has the cash to pay out dividends then surely there is a large directors loan balance
Interesting logical conclusion. It's a possibility, of course, but one does not necessarily follow the other.
Salary?
Why would they be sent packing if HMRC tried to claim it was a salary? Wouldn't they have some justification?
No - no justification whatsoever. HMRC may in appropriate circumstances try to argue that dividends are thinly-disguised salary payments. But that argument has nothing whatsoever to do with the legality or otherwise of the dividends.