Payment to directors in a company limited by guarantee

Payment to directors in a company limited by...

Didn't find your answer?

A (four-flat) property management company which is limited by guarantee has four directors one representing each flat.

The M&A give one of the company's objectives as 'To distribute among the members of the Company in kind any property of the Company of whatever nature'

The company has no assets or liabilities on the balance sheet 

The company has just sold a right of access to a developer to an otherwise land-locked piece of land for £75,000

The company received £75,000

I am planning to treat this as the sale of an intangible asset with a £nil base cost, Dr Bank Cr Profit on disposal of Intangible Assets. On this the company will make a profit of £75,000 and pay CT of £15,000

The £75,000 which has been received has been drawn out in full by the directors. 

As there are no shares this cannot be a dividend, what is the accounting entry for this transaction? Cr Bank Dr Director's current accounts

The directors started with a £nil balance on their current accounts. If this were an ordinary trading company with share capital the payment would be a dividend limited to net profit after tax (£60k) and so the directors current accounts would be £15,000 overdrawn.

As the y/e is 5 Apr 15 it is unlikely these will be back in balance within 9 months oif the y/e. If the maximum distribution is the net profit after tax does s.455 apply?

If the payment is not a dividend how is it reported in the director's personal SA Returns

Replies (5)

Please login or register to join the discussion.

paddle steamer
By DJKL
23rd Dec 2015 15:10

Do not think it is the sale of an intangible

I think the sale is a partial disposal of land and you need to consider A/A+B re the attributable cost. Whilst no discrete piece of land has been sold, being merely a right of access, it is surely a partial disposal as the granting of the access right reduces the future opportunities to develop the land.

Re the payments, if cannot be dividends they then surely need to be salaries, subject to PAYE, or loans subject to S455 and BIK. Maybe they ought to have considered what they were doing before withdrawing the funds!

 

Thanks (0)
avatar
By Joe Soap
23rd Dec 2015 17:52

maybe it would be better.............

If the balance after tax is paid out to the members/directors there will be some sort of tax liability on that payment.

Most flat management companies have costs - insurance, common costs, etc. If these are paid by the residents, either directly or through the company they are being paid out of taxed personal income. If in the future they were paid out of the remaining part of the sale proceeds it would be tax efficient.

But maybe it would run for too long.

 

Thanks (0)
avatar
By PCBACFV
23rd Dec 2015 19:40

Companies limited by Guarantee

It is not true that Companies Limited by Guarantee cannot pay dividends.  It is only if the Articles preclude the payment of a dividend that it is barred (such a provision in the Articles [used to be in the Memorandum] is a requirement for a charity).  Where the Articles permit the payment of a dividend, the Members of the Company (presumably the four directors in your case) can determine how the dividend can be divided between themselves (in the absence of shares).  However for HMRC to accept that a dividend has been paid they usually look for and at the date of a Members Resolution (a "final" dividend) or if authorised by the Articles a Directors Resolution (an "interim" dividend).

In your case the wording of the Articles "to distribute amongst Members in kind any property of the Company" creates a further problem.  To meet that would suggest that the rights that was sold on to the developer should ideally have been first distributed to each of the Members who then individually sold that right to the developer, with the CGT position determined on each individual basis.  

The alternative would have been for the Members to have passed a Resolution amending the Articles to remove the "in kind" qualifying words.  This would clarify that a cash dividend could be paid.

However in your case it appears that the appropriate resolutions were not validly passed before the cash was distributed to the Members/Directors. It is therefore likely that the Revenue would challenge that the payments were in fact a dividend and treat them as a loan until a valid dividend resolution was passed.

I would also support JoeSoap's comments about the desirability of keeping at least some of the proceeds in the management company to offset future service charges which would otherwise be paid by the Members.

Thanks (0)
Replying to Kaylee100:
avatar
By law man
24th Dec 2015 11:16

Repay loan, change articles, and then pay dividend?

PCBACFV: your explanation is very clear.

If the amount already paid out is treated as a loan, could the borrowers now repay it to the company?

Then the members of the company can alter the Articles to allow payment of dividend. Then pay out the surplus profit as dividend?

 

 

Thanks (0)
Replying to Hugo Fair:
avatar
By PCBACFV
06th Jan 2016 12:19

Treat initial payment as loan

Yes - I think that would work.

However I do have some concerns as to whether it is the management company and not the individual properties that sold the right of access.  For it to be income to the management company it would have to have legal title to the property that was acceding the right of access.  This could be the case if the management company owned the freehold, or a superior leasehold, of the four flats and the surrounding land, but this would relatively unusual.  If it did not own the land, then the management company would merely have collected the cash on behalf of the "registered" property owners as an agent. 

Thanks (0)