Paying dividends out of P&L reserves

Is there any restriction to paying a new shareholder out of P&L reserves

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I have a client whose wife is now an equal shareholder. My client did not declare all available profits as dividends for the prior year. Are there any restrictions to paying dividends out of P&L reserves from prior years or can she only be paid dividends out of profits since being declared a shareholder?

Replies (21)

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By nrw2
16th Dec 2022 14:38

Meant in the nicest possible way, are you an accountant?

Historic shareholdings have no bearing on dividends being paid today.

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Replying to nrw2:
By Ruddles
16th Dec 2022 16:13

Unless the Articles say otherwise. Highly unlikely in this scenario but one never knows.

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By CJaneH
16th Dec 2022 14:42

This is a Company, dividends are paid in relation to share holdings!

If you purchased shares in a PLC quoted on the Stock Market you would not expect them to restrict your dividend based on when you purchased the shares.

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Replying to CJaneH:
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By Hugo Fair
16th Dec 2022 16:35

... unless you purchased the shares Ex-Div of course! :=)

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By Paul Crowley
16th Dec 2022 15:22

If you do not understand how dividends operate then you really should ask yourself if there are other issues that you may have misunderstood.
Your prior posting indicate that you have clients

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Replying to Paul Crowley:
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By denise.poulter
16th Dec 2022 16:34

I’ve only recently started with a couple of small limited companies that have changed from sole traders to limited companies and it’s not an area I’m 100% confident in, it’s been some years since I studied and I had until recently concentrated on sole traders. I work alone and have no external network of support. I was second guessing myself and had already researched online, just wanted a confirmation of a friendly bunch of people on an accounting network. Wish I’d not bothered now, feeling very upset…

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Replying to denise.poulter:
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By Paul Crowley
16th Dec 2022 16:41

Companies are very different to sole traders
A director's loan the wrong way around (as in he borrowed from the company) gives rise to a benefit in kind and a S455 tax charge.
For companies you need to be on top of benefits rules
The consequences of error on a company are much more severe than sole traders.

You have been dealing with companies for three years now, per your posting record.
You really should make sure that you are up to date

EDIT
I do not deal with trusts or LLPs
I just did not have enough of them to feel comfortable
BUT sure as heck I see errors in LLP accounts done by those that should not be doing them.

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Replying to Paul Crowley:
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By denise.poulter
16th Dec 2022 16:49

I’m aware of that, I understand the difference between a sole trader and a limited company, I understand director’s loans. It was a simple question regarding P&L reserves bought forward for a new shareholder and yes, one I should have known but I was simply second guessing myself and asking a group of friendly people.

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Replying to denise.poulter:
RLI
By lionofludesch
16th Dec 2022 17:04

denise.poulter wrote:

I’m aware of that, I understand the difference between a sole trader and a limited company, I understand director’s loans. It was a simple question regarding P&L reserves bought forward for a new shareholder and yes, one I should have known but I was simply second guessing myself and asking a group of friendly people.

It might sound simple in your client's case but how would that work for Shell Oil? Would the directors have to consider who'd bought shares recently and whether they'd made enough profits since last Wednesday (or whatever) to pay out a dividend?

It would be totally unworkable.

Start looking out that CPD.

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Replying to denise.poulter:
RLI
By lionofludesch
16th Dec 2022 16:45

denise.poulter wrote:

I’ve only recently started with a couple of small limited companies that have changed from sole traders to limited companies and it’s not an area I’m 100% confident in, it’s been some years since I studied and I had until recently concentrated on sole traders. I work alone and have no external network of support. I was second guessing myself and had already researched online, just wanted a confirmation of a friendly bunch of people on an accounting network. Wish I’d not bothered now, feeling very upset…

Why don't you book yourself on some update courses in the new year? Not many face to face these days but plenty online.

I learnt far more after I qualified than I did in studying for the exams. Things change. If you don't keep updating your knowledge, it's inevitable that you'll make mistakes. If you decide not to bother, make sure your PI cover is up to date.

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Replying to lionofludesch:
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By denise.poulter
16th Dec 2022 16:52

Yes, thank you. I think I will. It’s tricky, it’s little holes in knowledge that isn’t always covered in courses and things that come up that you don’t regularly deal with. It sucks working on your own, you have no one to chat to about it which is why I thought I’d ask here.

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Replying to denise.poulter:
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By Paul Crowley
16th Dec 2022 16:57

Help lines are available at minimum cost
Ours comes free with the enquiry cover that we offer
Not used it in the the last six years, but then I do adequate CPD.

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Replying to Paul Crowley:
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By denise.poulter
16th Dec 2022 17:06

Mine’s extortionate, minimum of 5 credits (£500) when you might only need one credit. These are the fundamental basics that I have clearly forgotten and probably wouldn’t even come up on a cpd course. I do feel an absolute idiot now and will get my books back out and likely won’t be asking any questions here in the near future.

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Replying to denise.poulter:
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By Paul Crowley
16th Dec 2022 23:09

You got your answer at no cost
This site is a valid resource
Try answering any questions without looking at the answers
Same with the readers queries in Taxation, and Tribunal cases in the same magazine

The best way to know where you are is to test yourself, then read the answers

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Replying to denise.poulter:
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By Hugo Fair
16th Dec 2022 16:49

Sorry to hear that you're upset ... but try looking at it all from the point of view of your "couple of small limited company" clients, who may also be feeling very upset.

"it (limited companies) is not an area I’m 100% confident in"
"it’s been some years since I studied"
"I work alone and have no external network of support"
"I was second guessing myself"
... those are not the sort of ringing endorsements that would make your clients feel comfortable.

There's no shame in wanting to expand your horizons, nor in recognising when you don't have the requisite knowledge/experience to just jump in at the deep end.
Be prepared to 'sub-contract' work for which you are not equipped or even to turn it down until you've acquired those skills (through re-training, CPD or whatever).

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RLI
By lionofludesch
16th Dec 2022 15:32

Eh dear.

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By D V Fields
16th Dec 2022 21:13

The Companies Act 2006 Part 23 Chapter 1
https://www.legislation.gov.uk/ukpga/2006/46/part/23

Very useful when you want to prove or disprove an assertion.

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By Tax Dragon
16th Dec 2022 23:24

As CJaneH says, companies pay dividends on shares. The person that owns the shares gets the dividend on those shares. Say H and W now own 6 identical shares each. The company pays a dividend of £1,000 per share. They'll each get £6,000. They'll be taxed on what they receive.

But now I'm going to introduce a new factor. The shares have been made non-identical. Different dividends can be paid on different sorts of share. Company pays a dividend of £2,000 per share on the class W holds. No div is paid on the shares H holds.

W gets £12,000. H gets nothing... but he may be liable for tax on the £12,000 W received, by virtue of s624 ITTOIA 2005. (This section doesn't apply in the £6k each scenario.)

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Replying to Tax Dragon:
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By Hugo Fair
17th Dec 2022 13:07

An excellent example of why a lack of experience with "small limited companies" is not the only potential issue needing to be considered in OP's scenario.

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Replying to Tax Dragon:
By Ruddles
17th Dec 2022 13:53

If the circumstances are such that s624 would not apply in the case of a £6k each dividend then I would suggest that the maximum chargeable on H would be £6k.

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Replying to Ruddles:
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By Tax Dragon
17th Dec 2022 22:24

I was wondering that even as I said otherwise, and, now that you invite me to check, I see HMRC agrees with you.

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