COmpany client. One year trading and then ceased.
Paid for much of stuff private, hence Cr DLA of 20K.
THey've taken cash out of the company and some bright spark said they had to use dividend vouchers (only 3 cash lump sums so there's 3 divid vouchers, it's not a divid voucher to tidy up the drawings!).
But now having done the accounts there's a loss before tax and then dividends to further make it negative.
Plan is to strike off the company. I'm concerned about tax on illegal dividends.
On the basis that the dividends were illegal and profit never covered them, even though when the vouchers were prepared it was assumed there was, can we, er, rip them up. The cash drawn would then be repaying the Cr balance that exists (and is more than teh dividends so no o/d DLA).
Thank you
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Doubt it
A dividend is a dividend.
Even an illegal dividend is a dividend.
A lesson for your client on the wisdom of taking advice?
Sorry if that sounds a bit harsh.
I think what you need to consider is how HMRC will treat the payments given that they are not legal dividends but the directors have had the cash out of the company and that nobody else is likely to be interested in this other than HMRC. Options other than an acceptance as taxable dividend income are adjustment to DLA and you say that's ok as it won't overdraw them or salary that should have been subject to PAYE and NIC. Even if you rip up the dividend vouchers (not recommended) you will still have those same issues to consider. I think if you look at the HMRC manuals there is some guidance on there as to how HMRC would treat it.
the concern is s455 tax on illegal dividends.
Tiny tiny chance if it being picked up? Even though yes it is CT self assessment
I don't see why you can't...
... just rip them up. Nothing's yet on record yet that needs to be undone.
If, as a matter of fact, you can show that had the directors looked (as they should have done) to see whether there were sufficient reserves to pay the dividends they'd have found that the cupboard was bear, then the dividend is void.
The recipients that knew (or should have known) that the dividend was ultra vires hold the money on trust and are liable to repay it. They can do that by permitting the amounts involved to be deducted from the credit loan account balance.
They can agree (currently) that those deduction should be made retrospectively, in email correspondence with you for example. Since an ultra vires dividend is something that simply can never have happened in the eyes of the law. Then the three lump sums are simply debits from their loan account.
The only thing that's on record is that some of the dividends were in 12/13 and so have gone on TRs. Which can be amended if/as they weren't legal dividends.
THank you, Steve.
.
... just rip them up. Nothing's yet on record yet that needs to be undone.
There is now - it's been announced on the internet.
:-(
Ah for ACT ...
... If Prudence hadn't messed around with that a company would pay the CT over in advance each quarter, then it really wouldn't matter (and our pensions would look a sigtmore healthy).
It also made "retrospective" dividends tricky as you would have late CT61 issues!
Is the company fairly sound?
If the company goes bust (technical accounting term), as void dividends, they could be reclaimed and used towards all unsecured creditors (after preferential creditors). If the amounts are redirected to the DLA retrospectively, might this not be seen as preference? Of course, if the company is a sound going concern, this is an academic argument.
Dividend reveresal is not a preference
If the amounts are redirected to the DLA retrospectively, might this not be seen as preference?The cash has already left the company, and that could be treated as preferential repayment of creditors in an insolvency situation. Whether it was paid out for the existing loan account or the additional amount arising from illegal dividends is academic.
Cancelling the dividends is not a repayment at all, it is an elimination of a liability to pay the directors. It is no more preferential treatment than if a supplier raised a credit note on their account.
Thank you everyone.
The only creditors are me and the two directors.
Interesting about the reference in Co Act to "repay" a dividend as I'm not sure how this can be done. Cr Dividends in the 2nd accounting year? Or Cr dividends in the accounting year just ended which would then be followed by Cr bank Dr DLA again.
What does CA2006 say about it?
s830 says "A company may only make a distribution out of profits available for the purpose."
Therefore if there are no profits available then there is no distribution.
s847 says ".... If at the time of the distribution the member knows or has reasonable grounds for believing that it is so made...he is liable...to repay it"
So to my mind there never was a dividend and I see no objection to treating this as loan.
HMRC appear to agree with this....
CTM20090 says: -
"Frequently the dividend is found to have been paid unlawfully. If that is the case, the company's advisors will be able to rectify the situation by reducing or extinguishing the amount of the dividends and drawing up approved accounts showing only such amount of dividends as can be supported by distributable profits. Corresponding adjustments will be made to directors' loan accounts, if the dividends have been credited to such accounts in the company's books, or in draft accounts. "
As Steve says...
The short answer is rip the vouchers up
The long answer....
from HMRC manuals (CTM15205): -
"Where a dividend is paid and it is unlawful in whole or in part and the recipient knew or had reasonable grounds to believe that it was unlawful then that shareholder holds the dividend (or part) as constructive trustee in accordance with the principles stated by Dillon L J inPrecision Dippings Ltd v Precision Dippings Marketing Ltd [1986] 1 Ch at page 457. Such a dividend (or part) is void for the purposes of both the IT charge on distributions under ITTOIA05/S383 and the long abolished ACT charge under ICTA88/S14. The company has not made a distribution as a matter of company law, and so the dividend does not form part of the recipient's income for tax purposes. The company has not parted with title to the sum that it purported to distribute, which as a consequence remains part of its assets under a constructive trust (see also Ridge Securities Ltd v CIR (1964) 44TC373). Where the company concerned is a close company, it is regarded as having made a loan to the shareholder by virtue of CTA10/S455(1), thereby triggering a charge under CTA10/S455(2). Relief would however be available under CTA10/S458 where the dividend is repaid to the company. That repayment might be by cash or cheque, or by a suitable entry in the loan account"
results in the same position.