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Interim Dividends with insufficent y/end profits

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A company whose year end is September, declared an interim dividend in March 2016 after producing their management accounts and leaving a provision for corporation tax in the business, the interim dividend was declared, minited and the tax vouchers produced.  It was a legal dividend at the time as there were sufficient profits at the time to declare the level of dividend taken.  The Interim Dividend was included in the 2015-16 Self Assessment Tax Return for the Director. 

However, in the second half of the financial year there was a downturn in business so by the time the year end accounts were done it looks like the interim dividend was too high.  Does any member of the forum know what the protocol should be under these circumstances?  Should the overpayment of the interim dividend still be debited to the Directors Loan Account for the year end accounts and what should happen with the already filed personal tax return?  I can only find guidance online for illegal interim dividends online, where I believe these were legal at the time they were drawn.  The business has now returned to healthy profits so it is purely a timing issue when the year end accounts are drawn up.  Thank you for any assistance you can give.

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RLI
By lionofludesch
08th May 2017 13:16

If there were sufficient profits at the time the dividend was made, you're grand.

The directors aren't expected to be fortune tellers.

(Actually, this is increasingly untrue with FRS 102.)

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Replying to lionofludesch:
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By Sarah Sutton
08th May 2017 13:36

Thank you very much

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By tonycourt
08th May 2017 14:09

I don't think the interim dividend is safe. Aside from the usual formalities Companies Act 2006 (s.838) requires interim accounts that support a distribution to be "properly prepared" which means "prepared in accordance with sections 395 to 397 (requirements for company individual accounts)".

To cut a long story short this means adopting the accounting principles which would apply to the company's final accounts, that could be micro-entity or full audited, as appropriate.

If the "management" accounts had been prepared on that bases then irrespective of what happened in the latter part of the year there ought not to have been a shortfall of distributed profit.

Therefore, the interim dividend is partly ultra vires, (unlawful or illegal if you prefer those terms). That means the excess is repayable by the shareholders unless, I believe, they are minority holders (I think that in this situation that means those with 5% or less of the share capital - you might need to check this)

I believe therefore you ought to debit the excessive amounts to the shareholder/directors' loan accounts.

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Replying to tonycourt:
RLI
By lionofludesch
08th May 2017 14:13

Why do you say that ?

This company saw a temporary, unforeseen downturn in trade from which it has now recovered.

I see your approach as over-cautious.

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Replying to lionofludesch:
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By tonycourt
08th May 2017 14:40

I understood the OP's comments to mean that at the year end the interim dividend exceeded the distributable profit for the year.

If that's so, what I said, while strictly to the letter of the law, is not over cautious. In practice the overpaid dividend might not be be picked up. But the rules are the rules and I'm only the messenger (so don't shoot please). At least if the OP ignores the overpaid dividend she's knows where the company stands.

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Replying to tonycourt:
By Ruddles
08th May 2017 14:31

Tony, you could have saved yourself a lot of typing by reading s838(2).

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Replying to Ruddles:
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By tonycourt
08th May 2017 14:41

I like to give value for money!

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Replying to tonycourt:
By Ruddles
08th May 2017 15:16

But you haven't given any value - you've potentially sent the OP off on a wild goose chase. I urge you to read s838(2) again - carefully this time.

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Replying to Ruddles:
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By tonycourt
08th May 2017 15:34

I take the point about reference to "proper accounts", but that doesn't change anything else - for private companies you still end up at s.396, which requires use of the appropriate accounting practice for interim accounts. Or am I missing something?

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Replying to tonycourt:
By Ruddles
08th May 2017 16:25

I suspect that you are not seeing "public company".

For a private company, all that is required is that "Interim accounts must be accounts that enable a reasonable judgment to be made as to the amounts of the items mentioned in section 836(1)" I'm not sure why you think that takes you to s396 (other than the fact that the items mentioned at s396 are included in those items as to which a "reasonable judgement" is to be made) - unless it is now me that is missing something.

In any event, I'm intrigued as to how you arrived at the definitive conclusion that the interim dividend was, in part at least, illegal. There is nothing (that I can see) in the OP's post to suggest that even if they had gone to the unnecessary trouble of producing 'properly prepared' interim accounts there would have been insufficient distributable profits at that time.

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By johngroganjga
08th May 2017 16:01

I agree with lion and disagree with Tony.

I would go further, even if the shareholders were reckless in deciding to pay the interim dividend it remains a dividend for all conceivable accounting and tax purposes. There does not need to be a protocol for dealing with it because there is nothing to deal with.

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Replying to johngroganjga:
RLI
By lionofludesch
08th May 2017 16:36

Thank you, John and Ruddles.

As ever, keep paying the creditors - especially the Government debts - and nothing will happen.

That's how it works.

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Jennifer Adams
By Jennifer Adams
08th May 2017 18:44

Suggest refer to this article : Dividends:are minutes necessary
https://www.accountingweb.co.uk/business/finance-strategy/dividends-are-...

which states:
Interim Dividends
...the financial status of the company needs to be considered each time a dividend payment is made ....Unusually HMRC appears to appreciate the problem, the Corporation Tax Manual 20095 (17) states that accounts only need to be detailed enough to enable “a reasonable judgement to be made as to the amount of the distributable profits” as at the date of payment.

If the directors correctly prepare basic interim accounts and a dividend is paid on the basis of those accounts then that will be deemed lawful, even if, when the final annual accounts, prepared at a later date, show that at the time there was an insufficient amount available as for distributable profits."
The interim dividend is safe.

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By ASF
13th May 2019 19:02

At a previous company, we developed a spreadsheet model to support any decision to pay a dividend, and we dealt with interim distributions by restricting the profit available for distribution to include only the lower of YTD Profit or forecast final profit, after tax, for the year in question. Requires you to be forecasting full year profits on an ongoing basis, but not a bad business discipline, anyway! Remember to always have the Board minute to support the decision, as well.

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