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Can an unpaid dividend be rescinded after 3-4 yrs

My client has included dividends in accounts but effectively accrued in Directors Loans

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My client submitted personal tax returns on the basis that as the dividend was not actually paid to him, then he had not received it as taxable personal income. Now HMRC are looking at his personal returns and the client wonders if the unpaid dividends can be rescinded and added back to retained profits. There are no minutes or dividend warrants that they can find. I suspect the answer is no, and that they will have to pay the dividend and suffer the tax to date. This goes back to 2013/14.

Any advice appreciated

 

Replies (28)

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RLI
By lionofludesch
06th Nov 2017 14:46

They're credited to his Director's Loan Account ?

Then they're paid.

No question.

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Replying to lionofludesch:
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By [email protected]
06th Nov 2017 14:52

Thought so - Thanks

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Replying to lionofludesch:
By Ruddles
06th Nov 2017 15:14

But they weren't credited to the loan account. They were accrued in the loan account - whatever in hell that is supposed to mean ;) ;)

On a more serious note, if the dividends were never properly declared, then they're not dividends are they?

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By andy.partridge
06th Nov 2017 15:33

The dividends are in the accounts and they are in the director's account as 'paid'. What has happened is what was intended. The absence of paperwork to confirm the fact is not the same as absence of the fact.

I tend to be suspicious when a client 'prefers' to do their own tax return. This is the sort of nonsense they land themselves in.

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Replying to andy.partridge:
By Ruddles
06th Nov 2017 17:01

Well, we're (or rather you're) assuming that the dividends are in the accounts as such. There's nothing to suggest that is actually the case.

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Replying to Ruddles:
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By andy.partridge
06th Nov 2017 17:09

The suggestion is not mine but the OP's. See the sub-heading to the question.

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Replying to andy.partridge:
RLI
By lionofludesch
06th Nov 2017 17:12

I ignored the subheading as rubbish.

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Replying to andy.partridge:
By Ruddles
06th Nov 2017 18:19

Apologies - you're right. I think that I skimmed straight over the sub-heading as soon as I saw a reference to accruing something in the DLA.

It still doesn't help establish whether the dividends were properly declared, but I suspect this is one of those "we'll never know" cases.

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paddle steamer
By DJKL
06th Nov 2017 15:42

I would not hold out much hope.

We have preference shares with fixed rate and require to accrue the dividends (treated as interest paid). We had similar HMRC enquiry into the personal tax returns of the shareholders a few years ago.

We were fortunate, we had posted to accrued dividends, and I also had the foresight( good fortune) to have added a note into the accounts explaining these dividends had not been paid but required accrued (in terms of FRS25), the accrual was in effect clearly shown in the accounts as an accrual, worded as follows:-

"The dividends payable in respect of the 8% preference shares are in arrears as undernoted, a general provision for these having been made and included in Creditors;amounts falling due within one year"

These days we have a line within creditors within one year note,

"Cumulative preference share dividends unpaid"

After back and forward, delving into Articles, etc, we won the argument, but I expect, without them clearly being shown as accrued and unpaid rather than posted into DLA, we would not have won and I expect you will find the argument pretty difficult to win.

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Nichola Ross Martin
By Nichola Ross Martin
06th Nov 2017 15:58

If you have not properly voted a dividend then it cannot be a dividend. It's a question of fact. HMRC may well argue that it is salary and make a reg 72 determination. However if it is essentially a dividend paid illegally then it is not a dividend at all and it would be taxed as a deemed loan that is repayable back to the company. You will have to take a knock for s455 and beneficial interest and probably penalties for carelessness. Of course someone would have directed that the payment should be credited to the DLA and so there may be more to it than anyone can see here. More issues if the company is insolvent, hopefully not. Lots of guides on this (inc freeview) in the Director and Company sections of our website.

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Replying to Nichola Ross Martin:
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By andy.partridge
06th Nov 2017 16:08

The evidence, despite its incompleteness, suggests that a dividend was 'properly' voted and is a dividend. This is, I believe, what the OP is suggesting that HMRC are claiming too.

Makes a change from the usual mess of the client making multiple drawings then retrospectively claiming they are dividends, I suppose.

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Replying to andy.partridge:
By Ruddles
06th Nov 2017 17:05

Interesting conclusion - "I can find no minutes or other dividend paperwork" suggests that the dividend was properly voted.

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Replying to Ruddles:
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By andy.partridge
06th Nov 2017 17:10

I refer you to my earlier reply.

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Replying to andy.partridge:
By Ruddles
06th Nov 2017 18:22

Not sure how that helps - the fact that the dividends appear in the accounts means nothing. Simply that a journal entry was made to reflect what someone thought was, or wanted to treat as, a dividend.

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Replying to Ruddles:
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By andy.partridge
06th Nov 2017 18:29

Ruddles wrote:

Not sure how that helps - the fact that the dividends appear in the accounts means nothing. Simply that a journal entry was made to reflect what someone thought was, or wanted to treat as, a dividend.

I disagree. It's much more than that. It has happened over a number of years, not a single incident, and the accounts referred to are surely accounts that have been filed. Probably approved by the very individual who approved the dividends and certainly someone 'in the know'.

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Replying to Ruddles:
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By andy.partridge
06th Nov 2017 17:18

I also thought it was an interesting turn of phrase from the OP. Not that, for example, 'the client insists that a dividend was not voted . . . . and I can find no minutes or other paperwork.'

It sounded to me like, 'I know it was a dividend, but if we can find no paperwork (and if we can't HMRC won't be able to) can we treat it like making a promise with our fingers crossed behind our back.'

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Replying to andy.partridge:
RLI
By lionofludesch
06th Nov 2017 17:54

andy.partridge wrote:

I also thought it was an interesting turn of phrase from the OP. Not that, for example, 'the client insists that a dividend was not voted . . . . and I can find no minutes or other paperwork.'

It sounded to me like, 'I know it was a dividend, but if we can find no paperwork (and if we can't HMRC won't be able to) can we treat it like making a promise with our fingers crossed behind our back.'

Happen you're right.

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Replying to andy.partridge:
By Ruddles
06th Nov 2017 18:26

It sounded to me like "If the dividend was never physically paid in cash, can we treat it as if it never existed?"

Or "If the dividend was never properly voted, can we treat it as something else?"

Or ...

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Replying to Nichola Ross Martin:
RLI
By lionofludesch
06th Nov 2017 16:37

The OP doesn't say that there was no vote. He says there is no minute recording the vote.

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By andy.partridge
06th Nov 2017 17:27

Robin, if the drawings were not dividends have you figured out what you would 'prefer' them to be and the consequences of that preference?

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Replying to andy.partridge:
paddle steamer
By DJKL
06th Nov 2017 17:53

There may not be any withdrawls from the DLA, we are not absolutely told the position but it is implied in the not paid comment.

If there were drawings that were covered re the credits to DLA re "dividends" seems to me there likely were dividends paid.

One can only argue an accrual/ provision surely if not physically paid to director/shareholder, and even then argument may be weak, but if credited to DLA, shown in accounts as dividends and also withdrawn, well you know what they say about ducks.

If not, and if client is say both shareholder and director, how does he/she square signing the accounts showing dividends when none existed?

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Replying to DJKL:
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By andy.partridge
06th Nov 2017 17:56

Yes, I was getting ahead of myself.

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By Justin Bryant
07th Nov 2017 12:17

Assuming the dividends were illegal, there should be scope to reverse everything under a constructive trust argument per the case in the link below (which is arguably the exception that proves the illegal etc. "non-payment" rule):

http://www.bailii.org/uk/cases/UKFTT/TC/2016/TC05366.html

I think a similar point has been debated at length here before.

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Replying to Justin Bryant:
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By Matrix
07th Nov 2017 12:34

Where does it say that the dividends were illegal? My understanding is that the shareholder just doesn't want to pay tax on them.

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Replying to Justin Bryant:
By Ruddles
07th Nov 2017 12:39

I'm not sure why you thought it necessary to provide that link, Justin. It is common knowledge that if a dividend is ultra vires (and the shareholder had reasonable grounds to believe that it was) a constructive trust arises, with all the implications thereof. No need to wade through a decision to (a) decide whether it is relevant to the topic in hand or (b) understand the conclusion.

But I have seen nothing so far to suggest that the dividends were illegal in this case.

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Replying to Ruddles:
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By Justin Bryant
07th Nov 2017 12:53

Eh? I used the word "assuming" and also I would hardly consider that that is common knowledge!

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Replying to Justin Bryant:
By Ruddles
07th Nov 2017 13:09

In the context of the discussion, I think that "If" would have been more appropriate than "Assuming".

OK - hands up everyone here that didn't know that an ultra vires dividend can give rise to a constructive trust with the 'dividend' repayable to the company?

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Replying to Ruddles:
RLI
By lionofludesch
07th Nov 2017 14:14

Ruddles wrote:

OK - hands up everyone here that didn't know that an ultra vires dividend can give rise to a constructive trust with the 'dividend' repayable to the company?

I didn't realise it was just the construction industry, no.

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