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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?
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.
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.
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%.
Except that . . .
. . . the post in question from Paul Scholes states 21%. Not 2% and not 20%.
Just sayin'. :-)
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%.
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.
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.
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.
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.
Cumulative
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.
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.
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.
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.
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.
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!!!
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.
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.
Significant other adjustment to calculate retained profits
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.
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 ?
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 ?
Please could Ms Adams provide an answer to this question?
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
37089
less Estimated Corporation Tax Liability so far
7418
less Dividends Paid
11200
less Profit & loss journal entries
Retained Profit this period:
18471
Retained Profit brought forward:
-2048
Distributable Reserves / Retained Profit carried forward:
16423
Stick this behind dividend minute and QED
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.
dividends
.... 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?
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?
@ 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.
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.
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.