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.
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Replies (6)
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I don’t see how it was illegal. There were sufficient distributable profits at the time.
Unless there were some additional accounting adjustments at year end which should have been made at the time to calculate the reserves and weren’t made?
You don’t need to do anything apart from telling them that they are taking more out of the company than it can afford, and should be more careful in future.
So called illegal dividends are still dividends and should be accounted for as such.
''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''
illegal ?
unlawful.
At the date the dividend was declared , assuming everything above board ,the dividend was lawful.
A firm line in the sand.
Imagine, on 31 December 2019 the dividend is lawfully declared, at the 11th hour ,for s.455 purposes.
You are now preparing 31 March 2020 Accounts.
With Covid 19 considerations.
The March year end stock is worthless, Barrels of beer down the drain.
Trade debtors, publicans , are not performing and you have asset write offs.
You may even have a bust balance sheet at March.
You imply that the directors could then be personally liable for company liabilities due to an ''illegal'' dividend at December ( September ), S.455 would be least of their worries .
Do you have a copy of Smith and Keenan?
All the above stack up with me, as long as the accounts prepared prior to the dividend showed enough distributable reserves to clear the DLA then the dividend appears to have been paid in good faith.
The legislation merely requires that, at the time the dividend is declared, the directors reasonably believed that the reserves were available to do so.
I see this condition as having been met in the circumstances described.
If unlawful dividends have been drawn then presumably they are reversed to an overdrawn DLA?
As the Company is insolvency client should be advised to take insolvency advice.
