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Dividends: Are minutes necessary?

21st Oct 2014
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Questions on the practicalities of paying dividends are asked on a regular basis under the Any Answers area of AccountingWEB. In the top 10 of questions asked must be: “should minutes be prepared to support the payment of dividends” and “are dividend vouchers necessary for each payment made?” says Jennifer Adams.

It seems obvious to state but minutes are only required if a meeting has taken place. Whether the dividend paid is interim or final no meetings are required under the Companies Act 2006 for private limited companies - no meetings equal no minutes.

It is under the Model Articles (if adopted – clause 30(1)) that the allowed method of authorisation is to be found. The clause states that directors can agree payment of interim dividends among themselves but final dividends must be approved by ordinary resolution confirmed by a simple majority of shareholders; following CA 2006 and Model Article 30 (1a) this can now all be done in writing/by email.

Ask any accountant and he/she will say that they have lost count of the number of times  clients are told not to take monies out of the company bank account and call the payments ‘dividends’, only to subsequently find their advice has been ignored. s830 CA 2006 is the key section:  “A company may only make a distribution out of profits available for the purpose”. A dividend can only be paid if there are sufficient distributable profits out of which the payment can be made. If a dividend is paid that proves to be in excess of this profit or if made out of capital or even made when there are losses that exceed the accumulated profits then this is termed ‘ultra vires’ and is, in effect, ‘illegal’. (for further details see ‘Illegal Dividends’ article).

Interim dividends

Therefore the financial status of the company needs to be considered each time a dividend payment is made which can prove difficult with the payment of interim dividends unless the company is VAT registered and the accountant does the VAT return calculations. 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.

As Paul Scholes said under the question headed Interim Dividends:“It is actually so easy to do and you can scribble on a piece of scrap paper, turnover, less expenses, less 21% to give you available for divs, so, given the risks of not doing it, why would you not do so?”

Under the same question RichHall asked “can a sole director and sole shareholder effectively claim an appropriate resolution to issue an interim dividend has been made simply by thinking about it?” 

One section of the Companies Act 2006 of which it is doubtful whether any sole director (or possibly even their advisers) is aware is s357 which states that a sole director should record all director decisions in writing. Therefore every time an interim dividend is paid there should be a note made confirming that the director has considered the company’s financial position and is happy that a dividend payment may be made.

Final dividends

Every time a final dividend is paid a resolution for payment is required as passed by a majority of shareholders (Model Articles Clause 3 (1)). There is no need for every shareholder to sign the same confirmation document provided that all signed documents are in the same format. The resolution will have effect as at the date when the last shareholder has signed.

Evidence

Something in writing is needed whether the dividend be interim or final. Leave it to clients and nothing will be done so many members use their own standard text confirming due consideration of accounts and giving authorisation of the dividend (whether interim or final) which is then signed and dated by each director (or shareholder (depending upon the type of dividend) at the time payment is made.

AccountingWEB member Old Greying Accountant suggested that the text for an interim dividend template should be as follows:

“After due consideration of the financial position of the Company and on the recommendation of the directors it was noted that the Company's profits available for distribution (within the meaning of Part 23 of the Companies Act 2006) were more than sufficient to permit the payment of the following dividend"

Under the same question cfield suggested: “ for your client to send you an e-mail notifying you of the dividend and requesting documentation and book-keeping entries. I always e-mail my clients a memo for them to enter the amount/date (as recommended by me), sign it and scan it back. That way there is contemporaneous evidence that it was all done and dusted at the time, rather than back-dated.”

This is possible should the client appreciate that the withdrawal is actually a dividend and advises the accountant should the payment be an interim dividend. Obviously the same template is relevant for a final dividend calculated post preparation of the annual accounts.

Monthly dividends

There is nothing in CA 2006 or CTM that says monthly dividends cannot be paid and in fact such payments are specifically made possible under Model Articles clause 30 (6) but in response to another question on dividends, cfield advised that “the trouble with monthly dividends.... is that there is more chance of errors... For one thing, it is much more costly and/or time-consuming to do interim accounts every month. For another, the director may "forget" to properly declare them at the relevant time… Quarterly dividends are better as the accountant will often have to do a VAT return anyway and can knock up a set of accounts at the same time, including accrued corporation tax”. 

Monthly dividends always have the possibility of HMRC attack trying to prove that the payments are, in effect, salary payments. The use of the directors loan account (DLA) deals with most withdrawal payments but remember that where a DLA is overdrawn by more than £10,000 at any point during the year and no interest is charged or if charged, is charged at less than the authorised rate, the beneficial loan rules kick in.

Dividend counterfoils: Are they necessary?

Questions have also been asked under Any Answers as to whether dividend counterfoils must be prepared to support every dividend payment made. Dividend vouchers are not in themselves a legal document. There is no mention of vouchers in the CA 2006 but one is required for tax purposes under s1104 CTA which states that if a dividend payment is made into a bank account then a certificate of tax deduction must be issued, “within a reasonable period”.  Paperwork can be kept to a minimum by the use of a single voucher to cover payments made over the previous tax year. The Income and Corporation Taxes (Electronic Certificates of Deduction of Tax and Tax Credit) Regulations 2003 (SI 3143/2003) authorises the electronic delivery of dividend vouchers, the default position being that shareholders receive a hard copy but must ‘opt in’ to receive e-counterfoils.

Replies (30)

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Accountants Northampton
By Shamrock
22nd Oct 2014 08:18

Directors Loan
Instead of interim dividends what are the issues of drawing out a directors loan and repaying it when the final dividend is issued?

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By johnjenkins
22nd Oct 2014 11:08

Isn't it about

time company law was adjusted to allow for one man band ltd cos where the director is sole shareholder. The amount of times PAYE investigations harp on about overdrawn DLA being a benefit, when divis can be declared to cover.

Great article.

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By johngroganjga
22nd Oct 2014 12:37

Good article.  My only gripe

Good article.  My only gripe is that you don't seem to recognise that documenting that there are sufficient distributable profits is more of a live issue in some cases than others.

What about the small company turning over £150k a year, and generally making reasonable profits, that has £500k of retained profits financing £450k of freehold property and £50k of circulating working capital?

On the other hand a company lives from hand to mouth generally distributing profits as and when they are made.  Retained profits in the last accounts were twopence halfpenny.

Do you not agree that in the first case, the consideration of whether there are sufficient distributable profits can be documented with, to say the least, a light touch?  But in the second case of course you would have to advise that under no circumstances should interim dividends be paid other than on the basis of up to date and reliable management accounts.

 

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By Manchester_man
23rd Oct 2014 00:40

Quoted from the article

“It is actually so easy to do and you can scribble on a piece of scrap paper, turnover, less expenses, less 2% to give you available for divs, so, given the risks of not doing it, why would you not do so?”

This appears to be a typo. 2% should be 20%.

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Replying to Justin Bryant:
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By SimonP
24th Oct 2014 12:51

Except that . . .

. . . the post in question from Paul Scholes states 21%. Not 2% and not 20%.

Just sayin'.  :-)

 

Manchester_man wrote:
Quoted from the article “It is actually so easy to do and you can scribble on a piece of scrap paper, turnover, less expenses, less 2% to give you available for divs, so, given the risks of not doing it, why would you not do so?” This appears to be a typo. 2% should be 20%.

JAADAMS wrote:

Manchesterman - yes I know about the typo - it is 20% but I had to quote directly and Paul wrote 2% I suppose I should have included a brackets saying it was 20% but I thought that readers would know that and what I wanted was to show how straightforward the procedure is.

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Jennifer Adams
By Jennifer Adams
27th Oct 2014 17:46

Answers...additional comment...

Manchesterman - yes I know about the typo - it is now 20% but I had to quote directly and Paul wrote 21% I suppose I should have included a brackets saying it was 20% but I thought that readers would know that and what I wanted was to show how straightforward the procedure is.

John... I only have about 1,000 words for an article. I go over this limit many times when I write but I cant include everything.

This article was really pressing the point that minutes are relevant only if there has been an actual meeting and dividend counterfoils are not really necessary every time a payment is made. As the article shows there have been a number of questions asked on accweb on what is needed and what is not. Some accs do minutes and counterfoils each time payment is made but many do nothing and I was just trying to set out the law and practicalities under the Co Act.

cricket.... there is no case law as a judgement is not needed. As there is no need for a meeting there is no need for minutes. A resolution is required for final divs only - but that does not mean an actual meeting.

If there is more than one director a resolution can be sent by email and each confirm agreement. Evidence is a per detailed by 'Old Greying Accountant' suggests. And you cant have a meeting with yourself but you can confirm a resolution on your own.

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By Old Greying Accountant
24th Oct 2014 11:14

I think in editorial parlance ...

... you would put (sic) next to such items.

If you use IRIS CoSec, the vouchers are easy as they are generated when you put the dividend in the system (which you would as it feeds direct in to Personal Tax). The board minute also falls out but takes a little more effort, there for I do a voucher every time as the time savings is seconds.

As an aside, IRIS CoSec also then lets you produce schedules based on the company year or tax year, so useful in ensuring the correct amounts are in the accounts where the year end is not 5th April, especially when dividends are paid by DLA credit and not bank payment.

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By David Gordon FCCA
24th Oct 2014 11:50

Ltd co dividends

 

it now being all too easy, especially with the use of IT, we all tend to forget basic rules.

 The benefit of limited liability is not a cost and or work and or detail-free bonus.

 In law a ltd co is a separate person from its staff, directors, shareholders.

 We all tend to ignore this until / unless Joe director cannot pay his debts.

 So it follows there should be an exchange of paperwork between Mr Ltd and Mr Joe Director.

 As far overpayment of dividends is concerned, dividends are by definition a distribution of profits available for that purpose. No profits = no dividend.

 What may be done is for the recipient to waive entitlement to a dividend if subsequently there is not the wherewithal to pay it. 

 Any excess over profit or loan account that has actually been taken, may then be repaid or treated as bonus.

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By peterlashmar
24th Oct 2014 12:22

dividends - out of profits

Do not forget that available profits are now cumulative, i.e. since the commencement of the company. That is retained balance on P & L A/c at last annual accounts plus net profit after all usual provisions, incl. Tax, since then as confirmed by interim accounts and it is seemingly required that they are approved by the Board.

I do not have the statutory reference to hand which introduced the cumulative test but it was probably ss836-853, CA 2006

Interesting example of the effect of paying dividends in gross optimism of actual profits is the Queens Moat House Group debacle  (fraud?) where the Receiver, Administrator, Liquidator requirement repayment to the company.

 

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Replying to Fresh:
By johngroganjga
26th Oct 2014 07:13

Cumulative

peterlashmar wrote:

I do not have the statutory reference to hand which introduced the cumulative test but it was probably ss836-853, CA 2006

It's always been cumulative. If there had ever been a rule that said profits could only be distributed within, say, a year of being made, failing which you'd have to liquidate the company to get your hands on them, the change that you say took place in 2006 would have been a veritable revolution.

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By NeilW
24th Oct 2014 12:29

Fairly simple if you're organised.

I just go into Xero and save a copy of the balance sheet at the record date. But then I accrue things as I go along (and I have simple accounts). If the accounts system actually did the basics of accruing for corporation tax etc as it went along, then interim dividends would just be a question of looking at the distributable profits in the accounts system.

Building more automatic accruals into the accounts system would help get the number right. 

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By cricket
24th Oct 2014 12:36

Dividends

Perhaps Ms Adams could supply us with some case law about Minutes not being required etc.

What is her definition of a Meeting. If 2 people have a discussion is that not a Meeting?

It will only antagonise HMRC if some proper paperwork is not produced including not

providing a proper tax voucher for their SA Tax Return.

 

  

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By pawncob
24th Oct 2014 12:36

Notwithstanding

Everything stated in the article, accountants tend to deal with matters some time after the event, and it's always better to have a paper trail ten months after the dividend was sanctioned/paid than rely on Joe Bloggs' memory. Belt and braces saves red faces.

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By raybackler
24th Oct 2014 16:22

Liberty Accounts handles this

We print a copy of the P&L and Balance Sheet, adjust for current year Corporation Tax and then add that to the P&L Balance brought forward less any earlier dividends declared in the tax year to arrive at a maximum amount that can be declared.

We then make a recommendation for a dividend based on the overdrawn director's loan account and things like fully utilising the standard rate tax band, if possible.  This is sent by email confirming that we have examined the accounts and that the company has sufficient after tax profits to accommodate the dividend.

Once the client has approved the dividend, we enter it into the Shares menu item in Liberty, which automatically generates a minute recording the dividend and creates the dividend voucher.  These documents are then held as pdf files in the system.

Everything is done in the accounting system and also visible to the client.

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By Arm266
24th Oct 2014 16:37

Accounts support for monthly Dividends

I am surprised at all the talk of calculations on a piece of paper.  Most companies have accounting systems these days that provide monthly, and to date, accounts virtually at the click of a button, so you know whether there is justification for the monthly dividend.  I always print these out each month.

Equally, if the director runs a cash only business and doesn't take credit, the bank balance soon shows whether there is money [profits] to pay the dividend.  Often I have to delay dividends until there is cash available to pay them. 

I have a standard minute stating that the director can adjust monthly dividends himself in accordance with cash flow forecasts, and profits shown on the monthly accounts.  Even that is stupid, as I am the sole director and sole shareholder, so the meeting minuting this is one solely attended by me!!!

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By raybackler
24th Oct 2014 17:08

Need to be careful

Arm266 you need to be careful.  Cash generation is often an indicator that profits are being made, but it does not allow for the quarterly VAT bill, nor the annual Corporation Tax bill.  Also, profits available for dividends are reduced by depreciation, which doesn't affect cash at all.  If you have plenty of headroom in your bank account, you will probably be on the right side with your assumed dividends, but as you state above, often you have to wait until cash is available, so this makes it sound like you are sailing a little close to the wind.

I do agree with your comment about the use of accounting systems - see my post above.

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Replying to Clinton:
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By Arm266
27th Oct 2014 12:12

I, as many those who do

I, as many those who do calculations on a piece of paper, are probably below the VAT threshold so don't have a quarterly VAT bill.  As regards the Corporation Tax bill, I always transfer my generous estimate of corporation tax to another bank account, so that cash is not available, therefore that is taken care of.  As I have very few assets, mainly small amounts of equipment, that too is not a big issue.  If others take those precautions, then they should be safe to work on the accounting system results but, anyway, those are a far better guide than calculations on a piece of paper, which will probably ignore the factors you raise anyway.

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Replying to atleastisoundknowledgable...:
Hallerud at Easter
By DJKL
15th Nov 2014 16:46

Significant other adjustment to calculate retained profits

Arm266 wrote:

I, as many those who do calculations on a piece of paper, are probably below the VAT threshold so don't have a quarterly VAT bill.  As regards the Corporation Tax bill, I always transfer my generous estimate of corporation tax to another bank account, so that cash is not available, therefore that is taken care of.  As I have very few assets, mainly small amounts of equipment, that too is not a big issue.  If others take those precautions, then they should be safe to work on the accounting system results but, anyway, those are a far better guide than calculations on a piece of paper, which will probably ignore the factors you raise anyway.

But you have missed out the most significant item you need to allow for; the fee to the accountant.

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By mickeyparish
24th Oct 2014 17:40

Do you have to have a Final Dividend ?

What about a company that never pays a "Final Dividend", just a series of interims ? Would the last one paid in the FY be the one that has to be documented ?

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Replying to unearned luck:
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By cricket
17th Nov 2014 11:55

Final Dividend

mickeyparish wrote:

What about a company that never pays a "Final Dividend", just a series of interims ? Would the last one paid in the FY be the one that has to be documented ?

 

 Please could Ms Adams provide an answer to this question?

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By Old Greying Accountant
26th Oct 2014 13:46

FreeAgent/Openbooks ....

... puts in the CT provision at any given point and the P&L also shows the b/f reserves or deficit and shows a distributable reserves figure, here's one I prepared earlier:

 

Operating Profit 37089less Estimated Corporation Tax Liability so far 7418less Dividends Paid 11200less Profit & loss journal entries Retained Profit this period: 18471Retained Profit brought forward: -2048Distributable Reserves /  Retained Profit carried forward: 16423

Stick this behind dividend minute and QED

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Jennifer Adams
By Jennifer Adams
27th Oct 2014 18:44

answer to crickets' comment for case law....

.... there is no case law as a judgement is not needed. As there is no need for a meeting there is no need for minutes. A resolution is required for final divs only - but that does not mean an actual meeting.

If there is more than one director a resolution can be sent by email and each confirm agreement. Evidence is a per detailed by 'Old Greying Accountant' suggests. And you cant have a meeting with yourself (!) but you can confirm a resolution on your own.

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Replying to ireallyshouldknowthisbut:
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By cricket
16th Nov 2014 15:24

Dividends - Minutes

Dear Ms Adams,

Do you ever consider some of the practical difficulties you could create for OMB`s from some of your suggestions.

   

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Replying to ireallyshouldknowthisbut:
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By cricket
17th Nov 2014 12:00

dividends

JAADAMS wrote:

.... there is no case law as a judgement is not needed. As there is no need for a meeting there is no need for minutes. A resolution is required for final divs only - but that does not mean an actual meeting.

If there is more than one director a resolution can be sent by email and each confirm agreement. Evidence is a per detailed by 'Old Greying Accountant' suggests. And you cant have a meeting with yourself (!) but you can confirm a resolution on your own.

 

Dear Ms Adams 

Please could you clarify what you actually mean? 

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By Arm266
15th Nov 2014 18:56

I haven't missed it; I am the accountant !!!!

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Jennifer Adams
By Jennifer Adams
19th Nov 2014 18:42

Not my suggestions...

Cricket -  I have only written on the law as it stands and included other members suggestions I felt were worth considering and relevant to the text.

My remit is to write purely with the OMB in mind.

'interim' means 'on account' so if payments have been made as interim/on account then after the final accounts have been prepared confirmation of the final dividend is needed via the passing of a resolution.

Re 'clarification' - I'm not sure how I can make it clearer. Minutes are only possible if a meeting has taken place and there is no legal requirement for a meeting where dividends are concerned. A written resolution is needed to confirm the final dividend.

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By cricket
20th Nov 2014 08:33

Dividends

Dear Ms Adams,

1. So a meeting of the minds is totally irrelevant and does not need to be recorded?

2. What happens to the Final dividend where the interim dividends paid in an accounting period are exactly equal to the amount available for distribution in that period or just

no Final Dividend will be payable? Do you need a Resolution/meeting stating that? If

there is no meeting according to you nothing need be minuted?

 

 

 

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By Sheepy306
20th Nov 2014 09:18

@ cricket

General consensus seems to be that it was a very good article and some useful practical advice relevant to a lot of our firms and clients.

You've raised some queries, Ms Adams has answered them, you clearly don't agree, if you want further written clarification I'd suggest that you consult and pay for your own legal advice.

Probably time to move on.

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Replying to brumacosmin:
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By cricket
24th Nov 2014 13:43

FINAL DIVIDENDS

Dear Sheepy 

What has it got to do with you?

How do you know what the consensus is? 

Perhaps you could answer my query instead of Ms Adams.   

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David Kirk profile image
By David Kirk
26th Feb 2015 10:14

Illegal dividends

One other point to note is that an illegal dividend is still a dividend, so you don't actually have to consider the state of the accounts before declaring it (but should always document the decision at the time that it is made).  It is just that if there is a deficit on reserves as a result of paying it, the director is liable under the Companies Act to pay it back, and it is this that gives rise to the S. 455 charge and possibly a benefit in kind.  It is therefore preferable to have a look at the accounts at the time of paying the dividend to make sure that the company does have the necessary reserves, but this will only actually make a difference if the company does in fact have reserves at the time of paying the dividend but does not subsequently, for example if there is a downturn in the business after the dividend is paid.

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