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dividends exceeding retained profits

dividends exceeding retained profits

I realise this has been discussed before but id like to run the scenario past my learned friends on here.

just done some accounts for a small limited company; dividends taken were approx £40k

retained profits before divis were only £13k; meaning a deficit of £27k

There is a £43k direcotrs loan to draw on but the fact is the dividends were voted and paid each month and were transferred to the directors personal account (narrative on stmt says divi).

Furthermore a few weeks ago we scheduled the dividends for borrowing purposes.

Part of the deficit is a large deferred tax provision as a van was bought and 100% AIA claimed.

I think the accounts should remain as they are with the actual dividends paid being left as dividends.

A mate of mine that works at a different practice is saying net the deficit off the directors loan.

What does anyone else think!!??

All input greatly appreciated

Ned Ludd


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By Anonymous
18th Aug 2009 12:02

How illegal, if at all, were the dividends when they were declared? For example, when was the van purchased? If say not bought until the end of the year, at the time of declaring dividends the accounts up until then would not have reflected the deferred tax charge. You need to consider the available profits per the latest available accounts at the time of declaring each dividend. To the extent that those dividends are illegal HMRC view is certainly that they ought to be taken to the loan account.

I would initially have said just to leave things as they are and let HMRC raise the issue if they wanted to. But inviting HMRC to ask questions is not really to be recommended. My experience is that they generally don't seem to care about excess dividends, presumably because they haven't noticed or have assumed that the dividends were legal when declared. But with the figures in this case it would be a fair assumption that at least some of the dividends were illegal.

The other point is that with the level of dividends taken (to one individual?) is it not the case that at least part of those dividends are liable to tax at higher rate? If so, I would have thought it more tax-efficient to use the loan account.

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18th Aug 2009 12:13

thats a really good response
thanks a lot;

plenty to consider; the van was actually bought right at the beginning of the accounting period.

its a close company with 2 directors who take their salary and dividends fortnightly!

im in the process of looking at the approx position month by month to see how things stack up.

to be honest if the deficit was a couple of thousand i'd have just written it back to loan but £27k is a biggie.

many thanks for you input.

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18th Aug 2009 13:16

what evidence was produced
when each interim dividend was declared that undistributed profits were available?

If the evidence is there there is no need to backtrack.

If the evidence is not there then the all or some of the dividends are illegal and need to be repaid by the recipients or at least debitted to the loan account.

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18th Aug 2009 14:55

If they are illegal dividends you should do as your mate says and not turn a blind eye.

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By Anonymous
18th Aug 2009 17:29

think you may be over simplifying skylarking!
if a dividend is voted and documented as such then in my opinion its a dividend whether illegal or not.

its then a question of how you deal with the illegal divi.

simply re-categorising something purely for ease of accounts preparation is not whats its all about.

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By Anonymous
18th Aug 2009 18:57

I think
many people fail to understand what an 'illegal' dividend actually is. It is more than simply a distribution that, numerically, exceeds available reserves.

Company law clearly states that a distribution may only be paid out of available reserves. If there are insufficient reserves then the only conclusion is that the payment cannot be a dividend, no matter what you choose to call it.

The remedy, in law, is to repay the excess payment - though this is rarely enforced in practice. But if it is not a dividend, what is it? This is one of the few areas where I agree with the Revenue - it should be taken to the loan account.

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