Hi All,
A client takes a monthly dividend, which is done by a bank transfer out of his business account. He doesn't draw up any dividend vouchers or board meeting minutes.
Having told him that he will have a high personal tax liability for 2013/14, he now wants to cancel some of the dividends that he took in that year and declare them in the current tax year instead. Is there a way to do this legally? As no dividend vouchers were ever prepared in the first place, can these payments to the director be reclassified as loans?
Thank you.
Replies (29)
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But they weren't loans were they? You can't rewrite history.
Just because he or you didn't draw up dividend vouchers or board minutes doesn't change the fact that they were dividends.
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It is very much up to you and how you want to run things. Assuming this company is 100% owned and controlled by your client it is really upto you/your client.
They could ask you to can book the lot as "drawings" in the year (assuming his bank statement doesn't say 'dividend' then you are going to struggle) and run it through the loan account if you like. Its aint right, but what he is doing aint right either.
Or you can assume these payments are dividends (assuming sufficient reserves each month etc) and stick to your guns.
Neither situation is "by the book" correct.
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It is very much up to you and how you want to run things. Assuming this company is 100% owned and controlled by your client it is really upto you/your client.
They could ask you to can book the lot as "drawings" in the year (assuming his bank statement doesn't say 'dividend' then you are going to struggle) and run it through the loan account if you like. Its aint right, but what he is doing aint right either.
Or you can assume these payments are dividends (assuming sufficient reserves each month etc) and stick to your guns.
Neither situation is "by the book" correct.
Ever heard the saying two wrongs don't make a right?
I agree with the third response. If the bank account doesn't say Dividend you could treat the payments as loan, as no vouchers or minutes where prepared to confirm what the payments where for. But if it says Dividend in the reference, then you can't really change them.
However, you may have a further problem, as you will probably be aware that if the ''loans' make his directors loan account go too overdrawn in the year, he may have to pay S455 tax depending on the balance. Unless of course, the 'dividends' given in the following year, clear the account sufficiently within the 9 months.
See below
Can they? - yes
Should they? - probably not
Are they? No
As Ireallyshouldknow has pointed out it's up to you ad how you want to run things
Next year..
Should you treat the dividends differently, what are you going to next year when the client asks you to do something slightly more dodgy?
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@mrme, true you need to manage their expectations and give them a strong lesson on how this *ought* to be done properly, but there is no point waiving a rule book at them when quite frankly there is no-one policing it. Pick your battles! So long as you draw up the DL properly HMRC are not going to be that bothered as it will just come in the following year and they might get some interest too on the OD loan account.
I have most of mine take drawings and write in the dividends when we do their VAT every quarter.
Some dont do this, and I have a big fat disclaimer in my annual letter to them. My [***] covered and they are advised on the right thing to do, upto HMRC to enforce not me.
Consistency
From what you say they are either all dividends or none of them are.
If you disagree, what distinguishes the nature of one payment from another, apart from a whim?
That would be ...
From what you say they are either all dividends or none of them are.
If you disagree, what distinguishes the nature of one payment from another, apart from a whim?
... the size of the tax bill :o)
You are incorrigible
From what you say they are either all dividends or none of them are.
If you disagree, what distinguishes the nature of one payment from another, apart from a whim?
... the size of the tax bill :o)
This is a favourite AWeb topic
Most people probably do not properly perform the basic CA requirements for a valid (i.e. non illegal) dividend. If it was an interim dividend and the proper procedures weren't followed in some way, shape or form it would be reversible (repayable) on that basis and you would not need a tardis (the money, if paid, would be held as a constructive trustee i.e. a debtor) or if it was not paid you can simply cancel the interim dividend. Search this forum for previous comments on this.
To the OP
2013-14 accounts may not yet have been finalised. There is nothing wrong, whether legally (because shareholders have the final say) or ethically (because smaller enterprises do not normally have outside shareholders) to decide which payments are dividends and which ones are loans.
I agree with @taxguru. If the accounts for the period in which the payments were made are still in a state of flux, as they must be or else this question could not have been raised, and the payments in question are not unambiguously marked as dividends or loans, it is perfectly legitimate for the final decisions as to which payments were loans and which were dividends to be taken now.
Intention
I agree with @taxguru. If the accounts for the period in which the payments were made are still in a state of flux, as they must be or else this question could not have been raised, and the payments in question are not unambiguously marked as dividends or loans, it is perfectly legitimate for the final decisions as to which payments were loans and which were dividends to be taken now.
John, isn't the intention at the time key to this, as opposed to retrospective tax planning which it seems the OP's client wishes to engage in?
Edit - re-reading the OP it seems clear that the client considered these transactions to be dividends and only now, because of the tax implication, does he wish to reclassify some of them.
P11D
Disregarding the familiar debate which has been amply commented on, if they are director loans you'll not forget the beneficial loan implication (obviously no interest has been paid) so P11D; as well as the s455 for participator loan, if not 'repaid' within 9 months (consider the bed-and-breakfasting restriction).
My penny's worth is, it's the client's intention at the time of drawing the money which governs the treatment of each monthly payment. Now try and match that with the typical client, no documentation and an adviser's dilemma. Good luck.
OK, unless ...
I agree with taxguru and John. Provided that there is no documentary evidence that the payments were actually dividends or salary or loans, I think you can re-classify the payments retrospectively and do the appropriate paperwork retrospectively. What you cannot do is to declare dividends retrospectively when no payments were made in the first place.
OP says the 'client takes a monthly dividend', not that the client makes a monthly payment that has not been classified. OP also says client 'wants to cancel some of the dividends' (presumably, after hearing long after the event that his decision is not tax-efficient), not that there was doubt that they ever were dividends.
Does that change your specific advice to this OP?
Terminology
@AndyP
I agree that the way the question is phrased is fairly damning, but we all have clients who don't use the right terms and perhaps, the OP in phrasing the question has overstated what the client actually said.
The OP has had a good airing of the relevant arguments in response to his question. It is up to him to decide on his advice to his client.
@ Euan
Agree about terms and phrases, but here it is not the client's but the OP's terminology - the latter being a practising accountant and not a muggle.
I wonder what the OP will decide? I sense that it might be difficult not to be influenced by the cost to the client and a desire to keep on their best side. We've all been there.
I imagine he just means "payments of a type that we have been used to treating as dividends, but which are not unambiguously identifiable as such in the client's records".
Not wanting to re-debate all this
The Vardy case shows that intention is not the key thing in determining an illegal dividend. Also, I disagree with HMRC that it is necessarily a loan (see IRC v Botnar 1998 STC 38), as a constructive trustee shareholder (who receives an illegal dividend - assuming not deliberate) is clearly not a borrower and the company is clearly not a lender: 29. 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 Dillion L J in Precision 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 IT under ICTA88/S20 and ACT under ICTA88/S14 since 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 44TC at page 373). Where the company concerned is a close company, the company is regarded as having made a loan to the shareholder by virtue of ICTA88/S419 (2), thereby triggering a charge under ICTA88/S419 (1). Relief would however be available under Section 419 (4) 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. http://www.hmrc.gov.uk/manuals/ctmanual/ctm20095.htm
All very interesting but unless I am missing something no-one here has suggested that if the payments were dividends there was any question of them having been illegal.
At least that's not what the OP is asking about.
I suggested that they may be illegal
Per my comment above "Most people probably do not properly perform the basic CA requirements for a valid (i.e. non illegal) dividend", in which case that is a potential solution.
iIlegal
Per my comment above "Most people probably do not properly perform the basic CA requirements for a valid (i.e. non illegal) dividend", in which case that is a potential solution.
So you mean "illegal" in a wider sense than simply not paid out of profits?
You need to
Check this with a company lawyer, as it is a legal issue. (The advisor in the Vardy scheme (presumably) did not get the dividend checked by a company lawyer - the scheme failed due to an illegal dividend under company law.)