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DIVIDENDS

Year end accounts prep

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A few conversations recently have made me think about dividends.

If there is an overdrawn loan account at the year end then I disclose it but recently (with several people) I've been told that a dividend or salary (up to threshold) would be added to clear the account.

I know that this is wrong, but do a lot of accountancy practices do it? Is it considered a pragmatic approach? Really questioning ethics at the moment!

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blue sheep
By NH
21st Oct 2020 07:38

not sure what you are asking here - if you mean can we vote a dividend or declare salary to clear the DLA, of course you can provided it is declared correctly etc

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Replying to NH:
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By Sandnickel
21st Oct 2020 07:48

OK, let me put it more clearly. If you were preparing a set of accounts for Mar 20 now and there was an overdrawn loan account what would you do?

Edit: thanks for replying.

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Replying to Sandnickel:
By johngroganjga
21st Oct 2020 07:50

Disclose it as required, then vote a dividend now to cover it so that it is no longer outstanding nine months after the year end, and no S455 tax is payable.

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By johngroganjga
21st Oct 2020 07:48

If you are asking whether a dividend or salary that is decided upon after the year end can be backdated to the balance sheet date, the answer is definitely no.

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Replying to johngroganjga:
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By Sandnickel
21st Oct 2020 08:14

Thanks John, this is how I've always worked. However, I'm coming across more & more frequently that accountants do just that. To the point where I'm questioning myself.

Are you simply reflecting the "intention" of the client by effectively reclassifying the loan account movements as salary and/or dividend? Or are you committing fraud by backdating transactions?

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Replying to Sandnickel:
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By Anonymous.
21st Oct 2020 10:27

Sandnickel wrote:

Are you simply reflecting the "intention" of the client by effectively reclassifying the loan account movements as salary and/or dividend? Or are you committing fraud by backdating transactions?

I vote fraud. Well, it's not correct application of basic accounting principles, anyway.

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Replying to Anonymous.:
RLI
By lionofludesch
21st Oct 2020 10:31

Anonymous. wrote:

I vote fraud. Well, it's not correct application of basic accounting principles, anyway.

I vote forgery. But, either way, it's not good.

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By Mr_awol
21st Oct 2020 13:13

Can you backdate anything t clear the o/d DLA? No.

You are talking about salary AND dividends. Ignore salary. I have only ever seen two clients where a bonus has been ‘accrued’ at year end to be voted after date. I am of the opinion it just doesn’t happen. And certainly I’m not aware of any accountant who would go one step further and stick in salary payments that weren’t declared under PAYE at the time.

As for dividends - again you ‘can’t’ do it but I would say it’s very common. I only have a few clients where we assist them in reviewing reserves monthly/quarterly etc but several where we review reserves before large one off dividends and many where we conduct a review in February to check both reserves and personal tax position. That’s the way it should be done although clients sometimes need a bit of convincing, especially if they’ve previously been allowed to make it up when the Accs and TRs are being produced.

Interestingly I’ve had a few enquiries where dividend paperwork has been requested. They used to always want full minutes etc but the last one we had nothing (client was ‘doing their own’ and didn’t. HMRC didn’t take any action and effectively indicated they didn’t care about minutes as long as there was some paperwork - either as payments were made or a summary at year end - produced before the end of the tax/acc year they’d accept it. Whether you’d want to rely on that is another matter.

The intention angle is actually quite a good one. Take three clients, all using Xero, none of them with the first idea about dividends and none of them preparing paperwork. Both take four lots of £5k out but one posts to DLA, one posts to wages and the other posts to dividends. I suspect most of us would leave the dividends where they are and move the wages (assuming no payroll run) to DLA. An outsider would probably think it strange that we are generally happy to make that reclassification or take no action but moving them to where the director probably actually meant them to leads to a lot of head shaking and hand wringing. Sometimes I start to wonder if the pragmatists have got it right after all

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Replying to Mr_awol:
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By Sandnickel
21st Oct 2020 10:21

Thanks Mr Awol, for taking the time to write such a concise answer.

The salary thing is a new one for me, but it's been brought up. "Just put in a salary up to the threshold, you don't need to register a PAYE scheme for that (about £6k for 2020) and the rest as dividends".

I've always played it by the book, like John mentioned above, but I always worry if I'm acting in the best interests of the client. If another accountant would take the "pragmatic" approach of assuming any payments were dividends rather than DLA am I causing the client unnecessary tax by doing the right thing.

The fact that HMRC don't care is another indication to me, that nobody is really bothered about certain aspects of accountancy.

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Replying to Sandnickel:
RLI
By lionofludesch
21st Oct 2020 10:33

Sandnickel wrote:

The fact that HMRC don't care is another indication to me, that nobody is really bothered about certain aspects of accountancy.

Here's why clients don't believe us when we play it by the book.

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Replying to Sandnickel:
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By Mr_awol
21st Oct 2020 11:18

Sandnickel wrote:

The fact that HMRC don't care is another indication to me, that nobody is really bothered about certain aspects of accountancy.

I'm not saying they don't care - this one let the client off with it but it was pretty clear in all other respects that the transfers were supposed to be dividends - they had been posted as such in the accounting system, the bank statements had "dividend" in the reference, there were half a dozen shareholders (unconnected by family ties etc - genuine business 'partners') receiving dividends. They also said the annual summary (if that's what the client wanted to do in future) should be prepared before the tax/accounting year end, so that would prevent any backdating shenanigans.

Ultimately they were saying they wouldn't insist on monthly dividend vouchers/minutes prepared at the time, as they had requested previously. This represents a small shift but is notable nonetheless.

It also brings us back to our interpretation of intent. If this client had used the bank reference of dividend and had all the other hallmarks but had posted the payments to DLA on the accounting software, would/should that have made a difference?

There's also a difference between HMRC allowing something and corporate law. It isnt always about tax. What if there was a shareholder dispute and no paperwork - particularly if some shares had changed hands over recent years (or divorce etc). Could one party argue that undocumented dividends should be reversed to DLA (i doubt it but i don't know - I'm not a lawyer).

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Replying to Mr_awol:
Red Leader
By Red Leader
21st Oct 2020 13:14

What was the focus of the enquiry? Was it CT and an o/d DLA?

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Replying to Red Leader:
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By Mr_awol
22nd Oct 2020 06:51

No, but they did ask for all the dividend paperwork and then decide they didn’t care, and at £200k the dividends were the largest entry on the Return.

The DLA could have taken a £200k hit but if they’d decided the dividends were not legitimate I doubt very much they’d have let them be called loans. There would have been much more profitable reclassifications they could have gone for.

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RLI
By lionofludesch
21st Oct 2020 10:29

What, Tardis a dividend, you mean ?

No. What's the point ? Just declare a dividend now to cover the outstanding balance. Just as effective and, more important, legal.

Assuming you've enough profits and the dividend is declared within nine months of the year end and other things I can't be bothered to type in but should be blatantly obvious.

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Replying to lionofludesch:
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By Mr_awol
21st Oct 2020 11:52

lionofludesch wrote:

What, Tardis a dividend, you mean ?

No. What's the point ? Just declare a dividend now to cover the outstanding balance. Just as effective and, more important, legal.

Assuming you've enough profits and the dividend is declared within nine months of the year end and other things I can't be bothered to type in but should be blatantly obvious.

Agreed, although as mentioned above I think potting them back is so common that I wouldn't even like to speculate whether it is more, or less, frequent than doing it properly!

As for the point, I suspect in many cases the only difference is OD loan interest/beneficial loan benefit, and this is what drives people to rewrite history rather than simple disclosure.

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Replying to Mr_awol:
RLI
By lionofludesch
21st Oct 2020 12:29

Mr_awol wrote:

As for the point, I suspect in many cases the only difference is OD loan interest/beneficial loan benefit, and this is what drives people to rewrite history rather than simple disclosure.

What drives it is an inability to distinguish between the meum of a personal bank account and the teum of a company bank account.

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Replying to lionofludesch:
ALISK
By atleastisoundknowledgable...
21st Oct 2020 23:57

lionofludesch wrote:

What's the point ?

1. Load dividends into tax year of choice.
2. Remove any DLA interest charge.
3. Remove accounts disclosure.

And yes, we’re one of the many many firms that do it and I’m happy to admit it on here. Pragmatic approach it’s been said - director/shareholder intention I’m happy with. We tend to (although TBH not always) prepare & send dividend vouchers to be signed with the accounts. These may be one for, say, 31/3 and another pre-YE (if not March). Gets the best tax result in the SATR and also ensures no accounts disclosure or CT disclosure.

NB1 - Didn’t think I’d need to say it before reading this thread, but only assuming there are sufficient reserves!

NB2 - I do know that this isn’t the ‘right’ way to do it, but that isn’t stopping me. Client is (generally) declaring a dividend, just without recording it anywhere or sometimes even knowing that that’s the terminology.

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Replying to atleastisoundknowledgable...:
RLI
By lionofludesch
22nd Oct 2020 07:31

Ah - now we know where to pass the Tardis work.

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Replying to lionofludesch:
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By Paul Crowley
22nd Oct 2020 07:34

Per TD
It is a De Lorean

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Replying to Paul Crowley:
ALISK
By atleastisoundknowledgable...
22nd Oct 2020 07:54

Still not ashamed to say it.

When I was training, the partner always used to say “your wages are paid by the client, not HMRC”, so we did & I do consider what the client wanted/meant.

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Replying to atleastisoundknowledgable...:
blue sheep
By NH
22nd Oct 2020 08:12

atleastisoundknowledgable... wrote:

Still not ashamed to say it.

When I was training, the partner always used to say “your wages are paid by the client, not HMRC”, so we did & I do consider what the client wanted/meant.

Yep, agree with that, I would have put it a slightly different way -

You have 2 people that you are answerable to, the first and most important is the client, they sign the accounts, they pay the tax, they pay your wages.
The second is HMRC, you do have a responsibility to ensure that your client pays the correct amount of tax in line with legislation and HMRC practice, one of the reasons for that is that your client relies on you to ensure that happens.

With regards to this thread,
1. clients want you to make the best decisions to save tax - that means timing dividends to give them the best advantage.
2. HMRC do not give the backside of a rat about this issue except perhaps in isolated cases where illegal dividends have been paid, that of course is a different issue

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Replying to atleastisoundknowledgable...:
RLI
By lionofludesch
22nd Oct 2020 08:43

atleastisoundknowledgable... wrote:

Still not ashamed to say it.

When I was training, the partner always used to say “your wages are paid by the client, not HMRC”, so we did & I do consider what the client wanted/meant.

Careful!! You can justify anything on the basis of "somebody paid me to do it".

Why not review your client's affairs before the year end, while there's still time to act legally ?

If you can't meet your own deadlines, how can you criticise clients when they don't meet theirs?

Still, all this may end when MTD fully kicks on

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Replying to lionofludesch:
ALISK
By atleastisoundknowledgable...
22nd Oct 2020 10:01

lionofludesch wrote:

Careful!! You can justify anything on the basis of "somebody paid me to do it".

I have a line and I’m happy with where that is.

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Replying to atleastisoundknowledgable...:
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By Sandnickel
22nd Oct 2020 09:37

And this is really the issue that I have.

You admit that you are not doing this the correct way, but are also saying that you consider you are acting in the best interests of the client.

Based on this principle, if I do this the correct way then I'm not acting in the best interests of my client and potentially causing them a disadvantage.

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Replying to Sandnickel:
ALISK
By atleastisoundknowledgable...
22nd Oct 2020 14:05

Let me clarify - I take the approach that dividends were declared, just not evidenced at the time.

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Replying to atleastisoundknowledgable...:
RLI
By lionofludesch
22nd Oct 2020 14:15

atleastisoundknowledgable... wrote:

Let me clarify - I take the approach that dividends were declared, just not evidenced at the time.

Then so long as HMRC take the same approach (or don't ask), you're grand.

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Replying to lionofludesch:
blue sheep
By NH
22nd Oct 2020 14:23

Then so long as HMRC take the same approach .

[/quote]
Thats the point - they do!

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Replying to NH:
RLI
By lionofludesch
22nd Oct 2020 14:44

NH wrote:

Thats the point - they do!

I'd be less confident when we - I mean, you - are all submitting MTD stuff as a matter of course.

What if they notice that a March dividend suddenly appears in the records in October?

What if they develop software to pick up stuff like that?

If your client's on Xero (other software companies are available), there's no excuse for not reviewing the company's finances before the year end, is there?

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Replying to lionofludesch:
blue sheep
By NH
22nd Oct 2020 14:55

Oh if only life were that simple, we have quite enough to worry about without worrying about the what ifs

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Replying to NH:
RLI
By lionofludesch
22nd Oct 2020 15:05

As I often say to clients, "it's not my problem."

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Replying to lionofludesch:
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By Mr_awol
23rd Oct 2020 10:14

lionofludesch wrote:

If your client's on Xero (other software companies are available), there's no excuse for not reviewing the company's finances before the year end, is there?

To be fair, because Xero's success has been largely driven by bank feeds, i find that most clients using it have abandoned invoice scanning and Purchase Ledgers and gone onto some sort of unofficial cash accounting method. Some i correct and get them to do it properly, many i dont. They do, however, tend to use the software for sales invoicing.

What this does mean is that by and large all of the debtors are in but none/hardly any of the creditors are. As such, the majority (by value) of my year end adjustments tend to be:
- Bringing in creditors
- Charging depreciation
- Providing for tax
- Adjusting opening/closing stock/WIP
The first three of these reduce profits and would make it rather dangerous for the client to use the Xero records for checking reserve levels. The fourth could go either way, of course.

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Replying to Mr_awol:
RLI
By lionofludesch
23rd Oct 2020 12:41

Mr_awol wrote:

The first three of these reduce profits and would make it rather dangerous for the client to use the Xero records for checking reserve levels. The fourth could go either way, of course.


Have you gone mad ?

Under no circumstances should clients be doing this.

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By SWAccountant
21st Oct 2020 11:15

What's to say the withdrawals that put the account overdrawn weren't dividends in the first place?

It was probably the directors intention, and they probably had the power to declare the dividends.

I agree that you can't backdate the declaration of a dividend but that's very different to accurately recording one when it was paid.

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Replying to SWAccountant:
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By Tax Dragon
21st Oct 2020 11:36

Would you distinguish a one-off £10,000 bank transfer, say, from the daily dipping in?

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Replying to Tax Dragon:
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By SWAccountant
21st Oct 2020 12:53

Yes.

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Replying to SWAccountant:
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By Tax Dragon
21st Oct 2020 13:03

SWAccountant wrote:

Yes.

Just checking.

So, really, you were repeating Mr Awol's point, but less... how did Sandnickel put it? Oh yes, "concisely".

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Replying to Tax Dragon:
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By SWAccountant
21st Oct 2020 15:23

Having not read the thread thoroughly enough, it would seem so.

Although the dates and times suggest I posted 2 hours sooner, so maybe I did read the thread and the post didn't exist?

I actually don't know.

But what I do know is that the attitude of this place really is appalling. You love to blame it on Anon's and non-accountants/freeloaders (which is a problem), but the clique need to be right at all times.

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Replying to SWAccountant:
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By Tax Dragon
21st Oct 2020 15:43

There's truth in that - but (FWIW and IMHO) those elements combine. Take away the crappy questions and you take away a lot of the self-satisfied cliquey responses.

But there's a consensus growing to ignore the crappy questions. Break the circle. Let's all hope it works.

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Replying to SWAccountant:
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By Mr_awol
22nd Oct 2020 15:25

SWAccountant wrote:

Having not read the thread thoroughly enough, it would seem so.

Although the dates and times suggest I posted 2 hours sooner, so maybe I did read the thread and the post didn't exist?

I actually don't know.

But what I do know is that the attitude of this place really is appalling. You love to blame it on Anon's and non-accountants/freeloaders (which is a problem), but the clique need to be right at all times.

I can clear the first part up - ive just edited a post of mine form below and it has changed the posting date and time to now. So I probably wnet in and edited my post which is why it looks like it was posted after. I'd have only done a minor typo or something though.

The second point I could answer - in terms of don't get drawn into this modern craze of moaning that people are out of order if they pick you up on a small issue. Unfortunately im reluctant to do so as you'll take it as one of two ways - either encouragement to stick around and engage (if you accept my advice) or nasty bullying designed to push you away (if the guidance goes over your head).

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Replying to SWAccountant:
RLI
By lionofludesch
21st Oct 2020 12:26

SWAccountant wrote:

What's to say the withdrawals that put the account overdrawn weren't dividends in the first place?

It was probably the directors intention, and they probably had the power to declare the dividends.

I agree that you can't backdate the declaration of a dividend but that's very different to accurately recording one when it was paid.

If that were so, the OP would've said.

And were these withdrawals cash or his gas bill and council tax ?

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By Sandnickel
21st Oct 2020 12:47

Thanks for all the replies, to clarify this was a series of conversations I happened to be part of. If it were one then I would have brushed it off, but it was more than a few.

General consensus of these conversations (me in the minority), o/drawn DLA (however it's made up didn't seem to matter) cleared in the accounts by way of dividend (and sometimes salary). Didn't matter when said accounts were prepared and sometimes didn't even matter if there were reserves!

I just wanted to see what others thought / did in reality. I understand completely when it's just a case of putting the paperwork in place and the intention of the director/shareholder is clear. It's when it's not so clear cut that I'm considering here.

Also, it's not the director/shareholder but the accountants that I'm talking about who are making these decisions on the behalf of the client in some cases.

Thanks again, food for thought in the responses.

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Replying to Sandnickel:
RLI
By lionofludesch
21st Oct 2020 13:02

Interesting.

You need to be looking hard at your colleagues.

What else are they doing ?

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Replying to Sandnickel:
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By Mr_awol
22nd Oct 2020 15:22

What do you mean didnt matter if there were reserves?

Dividends were posted back to leave negative reserves? That, in addition to the comment of backdating salary with no PAYE scheme, suggests you might want to find a new firm to work for.

Edit: test if the posting time changes

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Replying to Mr_awol:
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By Sandnickel
21st Oct 2020 14:12

Yes, in one case the DLA was cleared down irrespective of whether the company had reserves or not (sometimes multiple years of negative reserves).

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Replying to Mr_awol:
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By SWAccountant
21st Oct 2020 15:27

Where almost certainly backdating of dividends will still occur.

I can probably find evidence of it in every job I've ever had and I'm sure everybody here can too.

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Replying to SWAccountant:
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By Mr_awol
21st Oct 2020 15:56

SWAccountant wrote:

Where almost certainly backdating of dividends will still occur.

I can probably find evidence of it in every job I've ever had and I'm sure everybody here can too.

I wasnt telling him to move due to backdating dividends.

If you read back i said that because of:
- The backdating of salary
- The inclusion of (backdated or not) dividends despite that leaving negativve reserves.

These two crimes against accountancy are much worse than posting a dividend to clear an od DLA

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Lone Wolf
By Lone_Wolf
21st Oct 2020 13:54

I think you've got to the bottom of what the correct answer is here

As to your question "do a lot of accountancy practices do it?", I would suggest it is much more widespread than this thread would suggest - and not just a practice adopted by your back alley dodgy practitioners, but also some pretty large firms (which I guess does put them in the bracket of "dodgy practitioner").

Those responding either don't want to admit they do it too, or simply don't get involved in these sorts of shenanigans. I'd suggest it is the latter in most cases.

Those that do get up to them are unlikely to respond admitting so, for obvious reasons, making it very hard to gauge how prevalent the practice is.

Here's the biggest problem for me though - many of those that do it genuinely don't believe they are doing something wrong, and are surprised when it is brought up as an issue.

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Replying to Lone_Wolf:
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By Sandnickel
21st Oct 2020 14:10

Thanks, yes that is the response I got when I questioned the practice. Responses were generally "that's what we've always done" indicating no thought behind it. Some people knew it wasn't quite right but looked on it as the pragmatic solution hence my question today.

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Replying to Lone_Wolf:
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By SWAccountant
21st Oct 2020 15:36

I agree entirely. I think it depends loosely on the age of the partner - like it was ok in the past.

I would also say that I don't think anybody cares. HMRC would rather have dividend tax than temporary s455 tax, and the only parties likely to report a small company for a breach of the Companies Act are its shareholders, which isn't going to happen where they are also the directors.

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My photo
By Matrix
21st Oct 2020 16:02

Dividends have nothing to do with the accounts prep.

However I have a few clients who don’t take dividends during the year, the bookkeeper books everything they have taken over salary to the DLA and I book a dividend for the day they sign the accounts and send them the voucher with the accounts. So they disclose the overdrawn DLA in the accounts and CT600 but it is offset by a dividend within 9 months.These few clients have always done this, I tend to avoid building up the DLA for newer clients so they don’t get into bad habits. I also hate P11Ds.

If accountants are doing what you suggest then it is lazy in addition to the other points raised - the accountant should instead be having timely discussions during the year and at least before the end of the tax year on how much to take in dividends.

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