I'm seeking advice on what we should do as accountants and tax advisers for a company we have discovered has declared c £200k illegal dividends.
Our client company had a large overdrawn directors loan account at 31.3.2019; profits were reviewed to Sept 2019 and were sufficient enough at that point in time that a dividend of c £200k was declared at 30.9.19 and this was used for purposes of S455 legislation to show HMRC that the overdrawn loan account was cleared < 9 months after year end therefore no S455 32.5% tax payable on the DLA at 31.3.2019.
We roll forward 9 months and are now doing the 31.3.2020 year end accounts; the internal accountant has produced accounts which now only show a meagre £60k profit for the year year which I am taking means that, the interim dividends declared in Sept 2019 are now illegal?
Do the dividends have to be reversed? If so, that obviously has an impact on the S455 calculation related to the overdrawn loan account at 31.3.19.
If the dividends do not legally have to be reversed, what should we advise the client to do?
The balance sheet is in deficit now at 31.3.20 (insolvent balance sheet) and I'm aware the client is wanting to go and attempt to borrow £250k to help with cashflow.
Do we need to make any special disclosures in the accounsts. The company is FRS1021a and is not audited.
If you can offer any other thoughts/advice, that would be helpful as we would rarely see this particular scenario with illegal dividends arise.