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Dividend Paperwork

Dividend Paperwork

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Hi,

I'm sure we've been through this many times before but am just wanting someone to confirm my understanding.

My problem is that a client I'm just taking on from another accountancy practice has until now paid himself dividends on a monthly basis depending on what the company can afford and then his accountants have checked with him at the end of the year how much he has paid himself and produced one set of paperwork dated on the last day of the financial year.  There is no significant DLA credit so he's not drawing from funds that are already his and the amounts taken over the year are significantly more than £5k so we're definately into BIK territory.  He says that the previous accountant says it's fine to do this as long as the dividend paperwork is issued at the end of the year and that he really doesn't want to do it monthly.  I have explained that there's not really a choice unless he wants it declared as a loan and a P11d produced but he insists it must be fine as the old accountants let him do it.

Can someone just confirm that I'm right on this.  I've seen it a few times before (although clients are generally happy to agree to regular paperwork) and I'm wondering if I'm just far too pedantic about the whole paperwork issue.  I understood it to be a legal requirement that the paperwork was in place before the dividend was taken and that if this wasn't the case it could cause real problems if there was an enquiry.

Am I right or am I being over the top?

Many thanks

BG

Replies (12)

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By blok
31st Aug 2010 14:09

.

You really dont want to ask this question on here.  It may well turn into a dog fight!!

I would be tempted to draw a line in the sand and move on.  You have your way of doing things and the other guy has his.  Never the twain shall meet.

I would estimate that more than 90% of small comany dividneds are "paid" without legally binding, well constituted paperwork in place.  Perhaps I am just cynical!!

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By tringyokel
31st Aug 2010 15:05

My feeling ...

 ... and I may be completely wrong, but I thought the important part was the procedure, not the paperwork.

So, it does not really matter if minutes of a director's meeting and dividend vouchers are produced before the dividend is paid but the director must have considered the company's position and decided a dividend could be legally declared.  And then decided to actually declare the dividend.

This could all take place in the head of the director (I'm assuming a sole director) but how do you prove this?  Having the paperwork leaves him less open to a challenge.

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Image is of a pin up style woman in a red dress with some of her skirt caught in the filing cabinet. She looks surprised.
By Monsoon
31st Aug 2010 15:24

Dividends

Technically, in an ideal world, you're right and the management accounts would be done, the meeting minutes would be documented, the dividend vouchers would be declared and then, and only then, the dividend would be paid.

This isn't an ideal world.

As Blok said, I would draw a line and move forward using your own methods. I wouldn't go back and open up prior years and declare BIKs and all that.

Some say that backdating a dividend is fraud. Playing Devil's Advocate, if the intent was always for the payment to be a dividend (as in, "Mr Client you will be remunerated through salary and dividend as it's tax efficient" "Ok, yes please Mr Accountant, that's how I will take money out of my company"), then 'backdating' the paperwork at the end of the year (or months later in the year) is not backdating at all, but catching up with a job that should have been done at the time (and was done in spirit/ in the director's head) but that he didn't get round to doing.... Doesn't everyone have things on their to-do list that they keep bumping to the bottom of the list?

Personally, I like to keep on top of things as they go along as I prefer to get things 'right,' but I think it's important to take a pragmatic view.

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By petersaxton
31st Aug 2010 15:51

Batty Girl is right

Batty Girl is 100% right.

Anybody advising anything else is leaving their clients open to extra tax.

There's also a difference between doing the paperwork late and doing the paperwork dated the last day of the accounting period.

Batty Girl, if your client wants to not do the paperwork and you have evidence that you have informed the client of the risk I wouldn't make a fuss any more.

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By billgilcom
31st Aug 2010 17:49

Just before the Employer compliance visit?

In these days of "surprise" visits and cross cutting tax evasion teams I would be very uncomfortable in a client paying himself "monthly" dividends without any paperwork. In the mind of the HMRC Employer compliance officer this is nothing more than the director paying himself a salary "without operating PAYE or NIC". Look out for the determinations and the uphill struggle of evidencing the dividends. Do it right and fully with ALL the paperwork and sleep at nights. Even better pay a small monthly wage and a quarterly larger evidenced dividend.

Remember that without paperwork to back it up the director/shareholder is doing nothing more than borrowing from the company from the company's funds - so what else is he doing illigitamely and exposing both himself and his asdvisers to potential grief in the future. They start not doing legitimate paperwork and end up not doing any when times get busy etc etc. Then of course they blame the tax adviser when it all goes wrong.

Of course if the company accounting date does not coincide with 5th April you also need a form PX1D for cheap loan benefits if the amount overdrawn at that date exceeds £5K.. more trouble and another risk factor for enquiry by HMRC 

Hope that this helps

Bill

[email protected]

 

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By AdShawBPR
03rd Sep 2010 14:40

Being technically right and getting HMRC to agree with you are n

I've just spoken to a client who had HMRC make him work out how much cash had been paid to shareholders over several years prior to dividends being officially declared and minuted.  Cost him over a grand in fees and he ended up owing £21 which he duly paid.

Technically, I don't think you need minutes but HMRC want evidence and the only way of being certain that they get it is to make sure everything is minuted every time a dividend is declared.  Anything short of that may be OK but it may not be.  I feel I'm being paid to give advice not just on the rules (which anyone can look up) but also on how they work in practice.

I think you're right to do it your way Batty Girl.  Sounds like a good job they changed accountants.

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By PUREaccountants
03rd Sep 2010 14:41

You're right

BG, spot on but like everyone else I would take a pragmatic approach. Draw a line in the sand with the past and inform your client that this is the way it should be done. 

Now, in my experience small (sole director, family run) companies are a headache. They never seem to have the time to do all their own work let alone worry about the legalities of taking money out of their company - surely it's theirs anyway?

It was for this reason that we changed our practice. All our companies now utilise us to produce at least quarterly management accounts, sit in on their "board meetings" and approve dividends as necessary.

This has significantly improved our fee income, the client feels that we are taking an active part within their business and has produced additional business advisory services too.

If you take the initiative to turn what appears a negative to something much more positive your client will thank you and reward your pocket.

Perhaps we could all learn to be a bit more proactive? 

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By Christop51
03rd Sep 2010 16:03

Dividend Payments

Most of us need all need a regular monthly cash inflow. Typically more than £475 per month.

Why can't such interim (say monthly) payments be debited to the director's loan account and then periodically 'cleared' with interim (either quarterly/half year/or even annual) dividend payments?

This would reduce paperwork and keep in most cases the director's loan account in credit. 

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By petersaxton
03rd Sep 2010 16:18

Maybe

If it does keep the loan account in credit it's all well and good; if not you're stuffed.

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By 41115BARRI
03rd Sep 2010 16:43

Simple solution

Maybe - you're right, why take the risk?

Estimate the dividend to be paid over the NEXT three months and, assuming you have sufficient distributable reserves, do minutes and divi voucher now. That divi is credited to the loan account and drawn against over the quarter. Repeat every three months. Simples.

Phili Wood

www.barringtons-online.co.uk

 

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By Batty Girl
03rd Sep 2010 17:09

Thanks to all for the replies.

Although I'm not happy with the way it's been done it the past, I have no intention of going back and changing it.  It's just a case of persuading the client to do it my way from now on.

Although there is of course some difference in opinion over what's OK, I feel from the replies that I'm happy with my approach and don't think that I'm being overly pedantic (although some might).  I'm a dotting the i's kind of person anyway!

As you've all said, everyone has there own way of doing things, but I just wanted to make sure that I wasn't being really over the top with my insistence of paperwork being produced for each dividend.

Thanks to everyone again, when you work on your own and have little prior experience in practice it's always nice to be able to get a bit of feedback from here.

BG

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By Carmichaels
03rd Sep 2010 21:07

insolvency view

I'm not suggesting that your client may be insolvent, but the current view from our side of the fence is that if the paperwork isn't done, it isn't a dividend.  There's a good article on the ICAEW insolvency web site - don't know if it is open access or not.

This means that if the director's loan account would be overdrawn because it was drawings not a dividend we will say "thank you very much" and ask for it back.  If the paperwork is usually done, it generally suggests that there was a standard procedure and paperwork got lost or whatever so he may get the benefit of the doubt.

I make no comments about declaration of dividend if the company is insolvent, I don't think this is what you were after. 

Best way I saw of dealing with it was years ago - pre-photocopied resolutions (presumably provided by the accountant) which were in the file next to the bank statements file.  Pay the outstanding bills, reconcile the bank, fill in the divi form all in one sitting.

Marc Landsman

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