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Too many dividends...

Too many dividends...

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One man shareholder/director operated company (oldco) for a year, then set up another company (newco) to work with someone else (same business, same clients etc).  I did accounts for oldco to 30 Sept 2011, and during the second year oldco stopped trading.  I don't deal with newco.  As is often the case, client would withdraw money, annotating it as "div/exps" - some of the payments were made in the early part of the 2011-12 accounting period, and reported on client's income tax return for 2011-12.  It now transpires that the accounts for y/e 30.09.12 show a loss, and not enough reserves to warrant the dividend payments.

Draft accounts show insolvent position; however, there are no 3rd party creditors (apart from my fee which I can recover from him personally) - it's just amounts owed to him as he had paid for various expenditure out of his own funds.   If I "undo" the dividend via the director's loan account, what are the implications for his personal tax return? 

My concern is that the dividends seem to have been "illegal", but that as no 3rd party liabilities, do we have a problem?

If I had had full info earlier, things might have been a bit different, but this is one of those last-minute type clients, and the accounts are due my the end of the month...

Has anyone had to deal with this situation before, and/or any suggestions or comments gratefully received.

Thanks

Replies (11)

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By johngroganjga
27th Jun 2013 14:11

Well I and many others tend to take the pragmatic view that if a payment looks like a dividend it is a dividend for both accounting and tax purposes, notwithstanding that technically it is unlawful.

But perhaps it's a bit different in a case where the company has ceased trading, as seems to be the case here, as there's no opportunity for the position to be repaired out of future profits. Has the client paid tax on the dividends (i.e. are they within his BR band)?  If not, retrospectively re-classifying dividend payments as loan repayments won't make any difference to anything will it?

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By graffle
27th Jun 2013 14:37

Dividend income did just tip into higher rate - just under £200 higher div rate tax paid.

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Replying to taxisvtaxing:
By johngroganjga
27th Jun 2013 14:45

Client's instructions

Well if there's £200 potentially to be recovered it's probably on the borderline as to whether there's any point.  I'd explain position to client and take his instructions.  Telling him it will cost £250 to amend his return and chase the repayment may make a difference!

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By rampanesar
27th Jun 2013 15:15

Unlawful dividend?

My understanding is that if at the time the dividend was declared / paid, and the underlying accounts showed distributable profits, then if subsequently the company turns a profitable situation into a loss - which can sometimes happen, then the dividend is lawful and should stand?

 

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Replying to Duggimon:
By johngroganjga
27th Jun 2013 15:20

Agreed

rampanesar wrote:

My understanding is that if at the time the dividend was declared / paid, and the underlying accounts showed distributable profits, then if subsequently the company turns a profitable situation into a loss - which can sometimes happen, then the dividend is lawful and should stand?

 

I agree.  That's certainly my understanding too.

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Replying to Duggimon:
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By tonycourt
27th Jun 2013 15:27

Disagree

A dividend is ultra vires, illegal if you prefer, unless it is paid out of profits. An exception is made where the recipient was not in a position, or could not be expected to be in the position, to know that the distribution was being made from funds other than profits.

I think it's fair to say that a single director/shareholder always ought to be in a position to establish whether a payment is out of profits or not. How they do it is not a concern of the law.

Where the dividend is illegal it ought to be repaid to the company - of course in this case, as John says, it's not really important as the cash, or the book entries, will just be batted back any fourth between the company and the director shareholder.  

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Replying to Duggimon:
By johngroganjga
27th Jun 2013 15:48

Disagree ?

tonycourt wrote:

A dividend is ultra vires, illegal if you prefer, unless it is paid out of profits. An exception is made where the recipient was not in a position, or could not be expected to be in the position, to know that the distribution was being made from funds other than profits.

I think it's fair to say that a single director/shareholder always ought to be in a position to establish whether a payment is out of profits or not. How they do it is not a concern of the law.

Where the dividend is illegal it ought to be repaid to the company - of course in this case, as John says, it's not really important as the cash, or the book entries, will just be batted back any fourth between the company and the director shareholder.  

Not sure why you headed your post "Disagree".  Can't see anything in what you say that is at variance with previous posts.  Have I missed something?

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Replying to Euan MacLennan:
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By tonycourt
27th Jun 2013 15:54

I was agreeing with you John......

......my reply was directly at the other poster who I understood to be saying that where a shareholder believed a distribution was being made out of profits it wasn't "illegal" if later it was found they had got it wrong. That's not always the case.

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Replying to DJKL:
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By rampanesar
27th Jun 2013 16:14

The other "poster" being me?

The other "poster" being me? I did not use the word "believed".

To pay a lawful dividend, the company must show within its management accounts (GAAP) that there are distributable profits. Then the directors could declare a lawful dividend and that is not illegal or repayable:

"Where

  •     a distribution, or part of one, made by a company to one of its members is made in contravention of the provisions of this chapter, and  •     at the time of the distribution the member knows, or has reasonable grounds for believing, that it is so made,

he is liable

  •     to repay it (or that part of it, as the case may be) to the company; or  •     in the case of a distribution made otherwise than in cash, to pay the company a sum equal to the value of the distribution (or part) at that time."

So in agreeing with you, you can't just be sloppy and guess the profits for a dividend! It has to be done right and when it is then it is not repayable if by some misfortune the company ends up with a loss. Loss such as where a large debtor has gone bad!

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By graffle
28th Jun 2013 12:09

Thanks all for your helpful comments.

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Jennifer Adams
By Jennifer Adams
05th Jul 2013 11:21

Articles on this subject are here...

May I direct you to previous articles on this very subject?

https://www.accountingweb.co.uk/topic/tax/dividends-checklist-get-details-right/470525 

The dividend does need to be legal and as the article states:

Companies Act 2006 (CA 2006 (s830) states that 'a company may only make a distribution out of profits available for the purpose'‘Profits’ in this instance are ‘accumulated realised profits less ....accumulated, realised losses’ (CA 2006 (s830 (2))

 And.....A significant consequence of payment of an ‘illegal’ dividend could arise if the company goes into liquidation and the liquidator or administrator routinely reviews the conduct of the directors over the three years prior to insolvency. If it is found that a dividend has been paid ‘illegally’ then CA 2006 s847 provisions apply and the directors will be expected to repay the amount withdrawn. (See Bairstow v Queens Moat Houses plc [2001] 2 BCLC 531 and ‘Do directors actually have the right to receive any remuneration - 30/01/2010').

HMRC will actively pursue this route being as they are often the largest unsecured creditor. All members should read ‘First Global Media Group Limited v Larkin [2003] EWCA Civ 1765)’ to appreciate how far HMRC will go in this matter and the importance of correctly dated and produced documentation.

 

>>>has the company paid the taxman in full?

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