Dividends greater than distributable profits

Dividends greater than distributable profits

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I have a client who has paid a dividends greater than distributable profits

PL Reserves b/f (loss):            (1K)  

Current Year Profits:                1.3 K 

Dividends Paid                        2.7 K

Directors Loan Account          1.7 K (in credit)

I would need to transfer where the excess dividend (2.4K) to the DLA and the overdrawn DLA would incur a Section 455 tax charge at 25% ?

Unfortunately these accounts are late so cannot do anything to prevent any subsequent charge.

Replies (8)

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By Matrix
15th Jan 2016 20:27

I think if it is an illegal dividend then it is still a dividend.  I have never come across this situation but I would not reclassify a Director loan as a dividend retrospectively so would not expect to reclassify a dividend as a Director loan.  Is the business more profitable in the last 9 months?  Can it afford to pay you and HMRC? Where did the company find the cash to pay the dividend? I will let others comment on the negative reserves on the balance sheet.

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By JimLittle
15th Jan 2016 22:20

deficit

There is basically a deficit of £700 which is my fee and the owner of the Ltd company has taken this unintentionally as dividend.  I am not sure if the company was more profitable in the last 9 months but the filing is late and there is not much scope to do anything apart perhaps levy a 25% charge on £700.  

Also, for just £175 tax seems a lot of hassle to pay the tax and then recover it later assuming the business becomes profitable or pays off the loan.

 

 

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By johngroganjga
15th Jan 2016 23:04

You are over thinking. No S455 tax is due because the loan account is in credit. As Matrix says the dividend is still a dividend, so forget about reclassifying it retrospectively. So just finalise the accounts, tell the director to take no more dividends without asking you first, and move on.

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Steve Edwards
By stevo5678
15th Jan 2016 23:06

Note in accounts
Put a note in the account under dividends stating that the director considered there to be sufficient funds to pay a dividend at that time.

Also put in a standard going concern basis adoption note

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Replying to Matrix:
RLI
By lionofludesch
16th Jan 2016 09:54

Whoa!!

stevo5678 wrote:
Put a note in the account under dividends stating that the director considered there to be sufficient funds to pay a dividend at that time.

....if that's true, obviously.

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By Andp
16th Jan 2016 09:40

" where did the company  find

" where did the company  find  the cash to pay the dividend " 

that's simple enough to answer -just don't pay your creditors and HMRC on time ? Dip into the bank overdraft, 

just carry on like some directors not giving a fig about their responsibilities.

I do not advise the above by the way.

 

 

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Steve Edwards
By stevo5678
16th Jan 2016 11:47

If it's a new company and they don't have an accountant at the beginning then it's perfectly understandable how this could happen. It's not easy for a new business to understand that there's not enough funds on the balance sheet when they have cash in the bank to draw.

After year one the clients gets educated and the excuses run out.

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By Scriptic
16th Jan 2016 15:20

Suggestion

Given the figures submitted this company is not long for this world so my advice is to get paid and quit pronto.

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