Do profits have to cover previous years' losses?

Must the year-end profit in an LTD company cover previous years' losses, before dividends are paid?

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Let us assume that a limited company has achieved the following financial results in three years:

I Year : Loss of GBP 2 000

II Year: Loss of GBP 1 000

III Year: Profit GBP 5 000 (after tax)

The company wants to pay a dividend for the third year, so does the profit from the third year have to cover the losses from previous years first (to be paid 2 000 GBP), or the entire amount of the profit after tax from third year can be paid out (to be paid 5 000 GBP)?

My question is very simplistic, it is only about the question of covering losses from previous years.

Replies (7)

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By paul.benny
22nd Nov 2022 12:33

Yes. In your example, max yr 3 dividend is 2000.

You might want to take your accountant's advice to ensure that other formalities are complied with.

Thanks (5)
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By sparkler
22nd Nov 2022 12:33

Dividends can only be paid to the extent that they are covered by retained earnings. If retained earnings (calculated as brought-forward profit / loss plus current year profit / loss) are negative, then a dividend cannot be paid.

In your example, retained earnings = -£2,000 + -£1,000 + £5,000 = £2,000

So in this case, the maximum dividend which can be paid is £2,000. The losses must be covered before dividends are paid.

Thanks (1)
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By Paul Crowley
22nd Nov 2022 12:51

Agree both posters
Recommend you get an appointment with an accountant as you are asking questions one at at a time.
If you are in year four, why are you looking to backdate dividends?
And does year 4 have any profit in it

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By Paul Crowley
22nd Nov 2022 12:54

Agree both posters
Recommend you get an appointment with an accountant as you are asking questions one at at a time.
If you are in year four, why are you looking to backdate dividends?
And does year 4 have any profit in it
Critically tax needs to be deducted from the profit together with any creditors

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Intercity
By Mr Hankey
22nd Nov 2022 14:45

The amount available for dividend would depend on how the profits/ losses have arisen. If, for example, they have all arisen from revaluation of investment property, then the maximum dividend amount would be £nil.

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Replying to Mr Hankey:
RLI
By lionofludesch
22nd Nov 2022 15:58

Agree, though, for most purposes, the maximum distributable income is the balance on the P+L - the one on the balance sheet, not the separate sheet showing the profit for the year - less any known losses subsequent to that.

If you (the OP) are thinking that this is complicated, you're right.

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By RFL H
23rd Nov 2022 13:00

Have you allowed for corporation tax losses b/f ?

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