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Dividends or something else

Dividends or something else

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I have been discussing with a new client how to prepare the relevant paperwork for dividend payments, and how to check whether there are sufficient distributable reserves, etc, which clearly all came as news to him.  Now we are preparing his accounts for the prior year, and he has told us that all the payments he made to himself were in fact dividends.  Should I ask him how this could be so, given that he hadn't known about the need for the board minute and dividend voucher until our recent meeting, or just accept his word for it, and ask for his paperwork even though I will suspect that it would be prepared now, but dated at the dividend date?  Or should I simply put the amounts as directors loan or salary and explain that we must make sure that going forward dividends are correctly declared and minuted.

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By nogammonsinanundoubledgame
11th Feb 2013 12:37

He is probably OK in my opinion

Minutes do not have to be contemporaneous with the events being minuted, although obviously it helps to negate an argument that the decision is being backdated in cases where alternative evidence is scarce and the point is challenged.

And if he is the only shareholder (or if all other shareholders were present and consulted at the time), then Re. Duomatic may provide some assistance if required.

Nor does a dividend suddenly no longer become a dividend if paid out of negative distributable reserves.  Sure, it is unlawful, but it is still a dividend.  According to HMRC it might be regarded as a loan to a participator for tax purposes (and I am not certain that their interpretation has been tested), but if at the end of the period all is back in credit I would not see this as a problem either.

Not that I encourage this procedure and I agree with you that moving forward it would be helpful to do it on a more belt and braces approach.

With kind regards

Clint Westwood

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Teignmouth
By Paul Scholes
11th Feb 2013 13:15

Agree

For me the important thing is what the client thought and intended at the time the money was drawn.

If, because of poor advice, a client had drawn dividends without paperwork then I'd go along with treating them as dividends but if, as sometimes happens, the client draws £X per month not knowing or caring what it was, leaving it up to the accountant to deal with the best split at the year end, then I'd put it all to loan account. 

If the client has a problem with that then they would need to take it up with the previous accountant.

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Jennifer Adams
By Jennifer Adams
11th Feb 2013 13:53

Read my article on this subject...

.. I wrote an article on this very subject a couple of years ago which is still relevant and legally correct.

The article starts with the comment:

HMRC are increasingly contending that such dividends are in reality earnings under the s62 ITEPA 2003 (salary sacrifice) rules and to persuade them otherwise needs proof that a set procedure for the declaration of dividends has been followed.

The article is written in the form of a checklist and many accountingweb members are giving the article to clients to view.

 https://www.accountingweb.co.uk/topic/tax/dividends-checklist-get-details-right/470525 

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By henry williamson
11th Feb 2013 14:01

Disagree

For me the important thing is not what the client intended to do at the time the money was drawn but what he actually did prior to drawing it, if, indeed, he did anything at all.

If he did not do anything at all then the payment cannot be a dividend because, at the very least, even an interim dividend requires prior declaration by the directors  that makes it clear that the payment is being made out of the profits of the company to the recipients in their capacity as shareholders. If there is no such prior declaration the payment cannot be a dividend.

Obviously, it is best practice to record the declaration of the dividend contemporaneously with the declaration.. If that doesn't happen the recording  can be done after the declaration and even after the payment but what cannot be done later is a record that says that a dividend was previously declared when no such declaration actually occurred at the earlier time - ie you can't turn an unspecified payment into a dividend retrospectively.   

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By andy.partridge
11th Feb 2013 14:51

Bank statement?

I would expect there to be some form of evidence to support the intent.

For example, if there is no contemporaneous paperwork I might expect the description on the bank statement to have a description or reference of Dividend or maybe 'Div' if that's not too ambiguous?

The question is, if he hasn't just got behind with his paperwork were the 'drawings' really just drawings or dividends? Unfortunately, I think too many accountants perpetuate the idea that it is OK to treat drawings as dividends when they do the accounts and possibly because they are too cowardly to risk upsetting the cosy arrangement they have.

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Euan's picture
By Euan MacLennan
11th Feb 2013 14:55

Is this how you treat new clients?

If I came to see you to get my accounts and tax sorted out, I would be put off by your attitude of "simply put the amounts as directors loan".

I agree with Clint and Paul.  Accept the payments as dividends, assuming that there are sufficient profits after tax to cover them, and ask the new client to follow a more correct procedure, or he will shortly prove to be a new ex-client.

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By andy.partridge
11th Feb 2013 15:07

But what is the correct procedure?

If it is simply OK to backdate dividends, then fine, but is it?

I have some sympathy with the OP who wants to know what is correct. How she then uses that information is up to her. If we are saying, 'It's wrong, but do it anyway' how does that sound to the outside world?

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Euan's picture
By Euan MacLennan
11th Feb 2013 15:49

Rights & Wrongs

In my view, it is wrong to declare backdated dividends when no money was ever drawn out of the company.

However, if money was drawn out in the past on the basis that it was dividends, it is acceptable to raise the paperwork in the form of a written resolution of a sole director subsequently, but the resolution should have a current date and be expressed as confirmation of dividends paid in the past, not pretend to be a resolution made at the time.  Divi vouchers are a bit superfluous with one-man companies where the same accountant is preparing both the company accounts and the director's personal tax return, but they can be a useful aide memoire - I don't think that a voucher prepared retrospectively adds much to the validity of the dividend.

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Replying to george52:
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By The Limey
15th Feb 2013 14:02

Relevant Accounts

Euan MacLennan wrote:

In my view, it is wrong to declare backdated dividends when no money was ever drawn out of the company.

However, if money was drawn out in the past on the basis that it was dividends, it is acceptable to raise the paperwork in the form of a written resolution of a sole director subsequently, but the resolution should have a current date and be expressed as confirmation of dividends paid in the past, not pretend to be a resolution made at the time.  Divi vouchers are a bit superfluous with one-man companies where the same accountant is preparing both the company accounts and the director's personal tax return, but they can be a useful aide memoire - I don't think that a voucher prepared retrospectively adds much to the validity of the dividend.

How can this be the case? The Companies Act is quite clear that dividends must be declared by reference to relevant accounts. Unless there are relevant accounts produced for the dividend to be declared against, there can be no dividend

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By DMGbus
12th Feb 2013 20:37

Some don't ascertain dividends until accs drawn up

I recall a recent comment from one contributor to another thread that suggested he/she could not ascertain dividends until the Ltd Co accounts had been drawn up.

Presumably that contributor is one of (I guess) many accountants who don't have clients draw up contemporaneous minutes for dividends, so have to see what's been drawn and/or what profits are available before putting a dividends figure on a personal tax return.   Then, there are other contributors ("the dividend police"?) who might take a dim view of this.   I think that there is a spectrum of opinions on this subject matter and what seems to be lacking is empirical evidence of problems with HMRC where the recommended (best practice) paperwork is lacking.

 

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By nogammonsinanundoubledgame
13th Feb 2013 18:11

Ah, ACT

Those were the days

With kind regards

Clint Westwood

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Replying to johngroganjga:
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By andy.partridge
14th Feb 2013 18:12

ACT?

nogammonsinanundoubledgame wrote:

Those were the days

With kind regards

Clint Westwood

 

I'd usually say, 'you are older than you look', but on this occasion . . .

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Euan's picture
By Euan MacLennan
15th Feb 2013 15:00

Companies Act

I assume that you are referring to s.836 CA 2006 which starts:

"(1)  Whether a distribution may be made by a company without contravening this Part is determined by reference to the following items as stated in the relevant accounts-"

and to the subsequent sections dealing with what the relevant accounts are.

The basic rule about dividends only being payable out of profits is set out in s.830 and the sanction for contravening this Part [23] is set out in s.847, in particular:

"(2)  If at the time of the distribution the member knows or has reasonable grounds for believing that it is so made, he is liable—
(a) to repay it (or that part of it, as the case may be) to the company,
"

If he was drawing dividends on the strength of the last (previous) accounts, he has not contravened Part 23.  When drawing dividends out of the current year's profits, the average person will believe that the company has sufficient profits to enable him to do so.  If the statutory accounts for the year subsequently prove that there were sufficient profits, he has complied with the basic rule in s.830 and the sanction imposed for a technical breach of s.836 is ineffectual.

We would all like clients to ask us to prepare management accounts for them every time they want to take a dividend, but it is not going to happen.  A contemporaneous minute on the lines of "Having confirmed that there are sufficient profits available, a dividend be declared" is just words if not backed up by actual accounts and has no more weight than subsequent approval of the dividends when the accounts are prepared.

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