Dividends: Are minutes necessary?
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).
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.
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.
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.
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.