Unlawful Dividend and company sale

Client overcooked the div!

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A month prior to sale, and fifteen days before year end,  the client declared a dividend to clear their DCA, turns out they didnt calculate the corp tax on the in year profit, and, as such have pushed the reseves negative.

In this circumstance, can we rely upon CTM15205 and thus, only treat the amount that brings reserves at that point to nil as a dividend for both the company accounts and personal income tax purposes?

Where a dividend is paid and it is unlawful in whole or in part and the recipient knew or had reasonable grounds to believe that it was unlawful then that shareholder holds the dividend (or part) as constructive trustee.The company has not made a distribution as a matter of company law, and so the dividend does not form part of the recipient’s income for tax purposes

Whereas; if the client did not know of the unlawfulness of the dividend;

A shareholder who had no knowledge of the illegality of the dividend and no reasonable grounds on which so to believe is not a constructive trustee and does not have to repay the sum, which will constitute a distribution under CTA10/S1000 (1) B. If such a shareholder then repaid the company (although not liable to do so) this is simply a voluntary assignment or transfer of the shareholder’s own income so that it does not affect the tax position.

If us now enlightening both the vendor, and buyer, who at one point were shareholders, classifies as making the recipient aware, do we re-do the supporting dividend paperwork?

Thanks in advance

Replies (10)

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By Bobbo
20th Mar 2024 14:46

Stats696 wrote:

If us now enlightening both the vendor, and buyer, who at one point were shareholders, classifies as making the recipient aware, do we re-do the supporting dividend paperwork?

From the CTM15205 you refer to: "When dealing with private companies controlled by directors who are shareholders, such a member ought to know the status of the dividend and it is expected that section 847 will apply in the majority of such cases."

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paddle steamer
By DJKL
20th Mar 2024 15:30

Why on earth would anyone declare a dividend pre an agreed share sale (assuming BADR on point)?

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Replying to DJKL:
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By rmillaree
20th Mar 2024 15:35

i think the overdrawn dloan forces the issue somewhat does it not ? ie would be stupid to have an od dir loan if that can be avoided and one is happy with result.

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Replying to rmillaree:
paddle steamer
By DJKL
20th Mar 2024 15:51

Well, that can surely be sorted at settlement (use part of funds received from share sale to settle, solicitor for purchaser pledges to settle direct to company as part of transaction )

Not sure how sale price gets agreed pre sale with the moving bits and no agreement re pre sale dividend unless generic agreement re part of price notionally to cover effectively certain assets inherent in price etc and variable part of price re reserves.

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Replying to DJKL:
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By rmillaree
20th Mar 2024 16:15

yes you might be right there - i was more thinking practicably speaking that If the funds could be repaid te sooner that is done the sooner the associated headaches (including interest charge) go away too - so to me it was totally logical that isue was sorted at first posible date - albeit that seems to have gone wrong on execution - that will probably surprise non of us here ! - as you say if its linked to share sale dividend might have been more expensive route if there were otehr options.

"Not sure how sale price gets agreed pre sale with the moving bits"

well it all needs to be outlined anyway doesnt it so its just another one that i would guess is plus or minus adjust to agreed price - unless they are like the unfortunate recent poster who didnt ask the question - hmmmm could this be the seller who sold the buisness to the buyer who posted recently !!! -

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Replying to rmillaree:
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By Stats696
20th Mar 2024 16:26

no previous post from me on this one!

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Replying to rmillaree:
RLI
By lionofludesch
20th Mar 2024 17:39

rmillaree wrote:

i think the overdrawn dloan forces the issue somewhat does it not ? ie would be stupid to have an od dir loan if that can be avoided and one is happy with result.

Plus - buyers are generally not keen on buying a lot of cash that they may have to pay tax on if they want to extract it.

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Replying to DJKL:
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By Stats696
20th Mar 2024 15:37

Horrific overdrawn DCA

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By TheTaxMan_
20th Mar 2024 19:38

The dividend declared can be by reference to the distributable profits available per the last submitted accounts.

Perhaps a long shot, but were distributable reserves available at ye 31/3/23 to cover your dividend.

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Replying to TheTaxMan_:
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By Stats696
21st Mar 2024 11:14

After an analysis, the reserves available at the date of distribution were (£12,147), 30/06 & y/e (£7,809), and share transfer date (£5,495).

Using CTM15205, would that reduce the div from £50,000, to £37,853?

And , as although we now know there were distributable profits post declaration, another div was never voted, and since we can only vote a dividend today, and not backdate a dividend, or anticpate future profits as at the oridinal dividend date, the post dividend profits now sit with the new shareholder?

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