reclassification of dividends to salary

reclassification of dividends to salary

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I had a scenario this year where the client draws quarterly dividends as well as minimal salary based on the previous year's profits, usually no problems. Very little profit is retained and when I finalised the accounts this year he had made a loss so I had to reclassify some of the dividend as a bonus which went through the payroll.  With RTI how would this scenario work as the Director will have received the payment as a "dividend" already in the year but if it is reclassified to avoid it being illegal then will we be in breach of RTI rules?  With all good intentions I have asked the client to let me have his books quarterly to try and keep ahead of the game but knowing the client it may not be that easy.  I'm sure other accountants must have clients like this.  Any thoughts on how to deal with this scenario and the implications? 

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By andy.partridge
17th Mar 2013 12:51

Bonus?
Under the old scheme your client would have been late paying PAYE wouldn't they? I would reclassify instinctively as a loan before I thought of a bonus.
At least the new scheme might make some directors act with a little more thought and professionalism.

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Euan's picture
By Euan MacLennan
18th Mar 2013 10:24

Dodgy practice

Reclassifying dividends as pay was always wrong and, as Andy says, was likely to result in late PAYE and also, incorrect annual PAYE returns which would have to be amended subsequently.  RTI will just make this practice even more dodgy.  I agree that the obvious "reclassification" would be a loan, but if you must do that, don't forget the s.455 tax and possible BIK to go on a P11D.

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By johngroganjga
18th Mar 2013 10:54

Agreed

Agree you can't reclassify dividends as salary retrospectively.  If payments are not dividends they are loans, until a bonus is voted and put through PAYE.  That way there is no late payment of PAYE and no RTI issue to worry about.  But, as has already been said, watch the other tax issues if loan account goes overdrawn.

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By dggriffin
18th Mar 2013 19:35

The client has a June year end so was able to put it in to the current tax year. Obviously with RTI this can't happen now. One man band Companies don't seem to grasp the concept that they and the Company are separate entities and he draws money as and when he needs it so the loan account was already overdrawn up to £5k.  I had in previous years advised a quarterly dividend provided the profit was there but I cannot pin him down to let me have his books quarterly to check the situation so it's the usual year end scenario to sort out.  It just seemed easier to deal with this as a bonus than explain to the client about the loan and having to pay tax on it anyway the bonus means he has a larger loss to offset against future profit I figured and falling within the tax year no end of year penalties for an incorrect P35. I will need to try and drum it into him again by explaining the consequences in light of RTI.

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Replying to JDBENJAMIN:
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By taxinfo
20th Mar 2013 12:24

that attitude is not unusual

dggriffin wrote:
One man band Companies don't seem to grasp the concept
It seems to me that most one man band operators don't grasp ANY concept so far as financial regulations are concerned. To them they view such rules and regulations as just "getting in the way" and can be heeded or not as they see fit, without consequences.

 

For example, has your client thought about auto enrolment for workplace pensions? Something else he will no doubt ignore when the time comes (assuming he is still in business).

So long as a he is not paying himself an annual salary above the automatic enrolment earnings trigger, and he is the only worker in the business, then the pension auto-enrolment legislation will not apply.

However, does his company employ anyone else? Perhaps his wife/partner?

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By User deleted
18th Mar 2013 23:48

The point is ...

... you look at available reserves, if there are none there is no legal dividend availble. At the very least the client should have cash at bank, plus debtors less creditors to give available reserves (plus stock/wip if appropriate)! If they can't do this I would question their application of CA2006 record keeping requirements.

If there were available reserves and you have the proof, even if the year end has a deficit there is no need to "reclassify". If significant make disclosure in the accounts, I have done this on occasion where trade has unexpectedly dipped and failed to cover overheads for a period - the year end is after all an arbitrary line in the sand.

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Teignmouth
By Paul Scholes
18th Mar 2013 23:15

Agree with OGA

To be brutally honest, if a Ltd Company client is not prepared to take this seriously and comply with the requirements to keep up to date records then, I would not act for them.

Even the one wo/man band ones, without a formal accounting system, can keep a rough spreadsheet with income-expenses-minimum salary- 20% tax provison, each month, to indicate their dividend pot.

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