An owner/director of a Ltd company is paying himself £600 salary per month plus dividends out of his business bank account. He is also paying PAYE of around £6 per month to HMRC outof the same bank account. The dividends comprise 2 elements; a fixed monthly standng order described as "Dividend payment" and additional dividends, described as "Extra dividend" which vary according to how much personal/household expenditure he has each month. The business bank account never goes overdrawn as he can only draw on what has been paid into the business bank account by clients.
I am not in practice and and have had very little exposure to payroll etc. but on a recent training course the Tax Expert presenting said, that to cover all eventualities, all dividend payments should be documented in writing and signed off by the director/s. This will avoid HMRC potentially declaring that the dividends are actually salary and issue a notice for payment of backdated income tax PAYE etc. Is it really necessary to document the dividend payments every time they are made? If it is necessary, then can an annual declaration/document/AGM be drawn up stating that variable dividend is paid throughout the year on the condition that the business bank account does not go overdrawn?
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Dividends
Belt and Braces.
Aways fully document and ensure the minutes are signed.
Yoshik
HMRC would have fun here...
Labelling something as a dividend in a standing order or other bank transfer doesn't make it so. A dividend requires documentation and needs to be based on some form of assessment that there are sufficient reserves to pay any dividend.
To avoid HMRC challenges that dividends without the necessary paperwork are salary, regardless of the legal merits of this position, requires more discipline.
To be properly constituted dividends, dividends should ideally be issued at most quarterly, come with both signed board minutes and dividend voucher.
Presumably your client is formerly self-employed and equates dividends to drawings. They are not the same.
This would worrry me
"The business bank account never goes overdrawn as he can only draw on what has been paid into the business bank account by clients. "
Where is the provision for corporation tax in all this?
That's a yes from me also
It's so easy to produce a minute (I prefer written resolution) each time a dividend is paid it's daft not to. In fact in the bookkeeping software we use, the moment you enter a dividend into the books it produces the paperwork for you.
Just to reiterate the previous couple of comments, dividends are paid out of post tax profits regardless of whether the bank is overdrawn or not, so, yes, if nothing else you need to make sure 20% is put by for tax and the director should also anticipate any large bills outstanding as they have already reduced profit, whereas, of course, outstanding invoices will have already generated income. The minute/resolution is to confirm that the director has considered the current state of play on profits and that they are sufficient to cover the dividend.
Yes, you can do it once a year but, if the director needs to draw, then it's best done in month 1 for the drawings to be taken out of it, but only, of course, if the director is sure there will be profits to cover it.
Minutes versus Written Resolutions...
It's so easy to produce a minute (I prefer written resolution) each time a dividend is paid it's daft not to. In fact in the bookkeeping software we use, the moment you enter a dividend into the books it produces the paperwork for you.
Yes, for a one-man-band a written resolution is fine, but for husband & wife style companies I always advise quarterly minutes as it is documentary evidence that the wife is involved in the running of the company and that her role as director / secretary is not a total sham.
I'm just old fashioned and paranoid though...
Not old fashioned at all (that's my job)
All my written resolutions have to be signed by all directors, even though I think you only need a simple majority, so with H&W, both will sign. Come to think of it, the minutes are only signed by the chair-thingy, so I think are less representative, especially if it was obvious, because of a dental appointment, visit to the shops, pub or family, that one or both of them couldn't have been at the meeting?
timing shouldn't be a problem
All my written resolutions have to be signed by all directors, even though I think you only need a simple majority, so with H&W, both will sign. Come to think of it, the minutes are only signed by the chair-thingy, so I think are less representative, especially if it was obvious, because of a dental appointment, visit to the shops, pub or family, that one or both of them couldn't have been at the meeting?
I don't include the time of the meeting on the minutes, and would think it perfectly possible that a meeting could take place "at head office" with only one of the directors present, as the other could attend via telephone or skype, for example.