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Dividends checklist: Get the details right

Posted by Jennifer Adams PM | on Tue, 04/01/2011 - 13:04 53181 13 comments print
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In another easy-to-follow guide, Jennifer Adams sets out a checklist for ensuring that dividend payments will meet with HMRC's approval.

My previous article on directors’ loan accounts explained that the debit balance on a directors loan account is repaid either in cash or more usually via dividend. The dividend procedure is just a matter of making the correct journal entries to show the final amount declared in the correct place on the balance sheet – yes?

Not quite. HMRC are increasingly contending that such dividends are in reality earnings under the s62 ITEPA 2003 (salary sacrifice) rules and to persuade them otherwise needs proof that a set procedure for the declaration of dividends has been followed.

The following check sets out points to consider when preparing such a procedure:

1. The dividend must be legal
•Companies Act 2006 (CA 2006 (s830) states that 'a company may only make a distribution out of profits available for the purpose' – it is vital that director/shareholders appreciate what this means. Namely that even if the bank account is in credit the company needs to have sufficient retained profits to cover the dividend at the date of payment.
•‘Profits’ in this instance are ‘accumulated realised profits less ....accumulated, realised losses’(CA 2006 (s830 (2))
•Any dividend paid in excess of this profit, or out of capital or when losses are made is ‘ultra vires’ and, in effect, ‘illegal’.
•The financial status of the company therefore needs to be considered each time a payment is made. If regular amounts have been withdrawn (including the monthly payments our clients all insist on drawing in lieu of salary) then the amounts are deemed ‘illegal’ if at the date of each payment the management accounts show a trading loss or the profit cannot support the payment. HMRC will argue that ‘in the majority of such cases’ the director/shareholder of a close company will be aware (or had reasonable grounds to believe) that such a payment as dividend was ‘illegal’ (CTM20095 (27 and 29) and It's A Wrap (UK) Ltd. v Gula & Anor [2005] EWHC 2015).
•Full accounts are not required for the calculation of an interim dividend. Accounts of the detail that enables ‘a reasonable judgement to be made as to the amount of the distributable profits’ at the date of payment are acceptable (CTM20095 (17)) (also see ‘Proper Declaration of Dividend’ below).
•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.

2. Proper declaration of dividend
•Directors can authorise payment of interim dividends (see new Table A s30 (1)) but final dividends need to be approved by ordinary resolution confirmed by a simple majority of shareholders; following CA 2006 this can now all be done in writing – no meetings are required.
•Therefore suggest a standard text is prepared confirming due consideration of accounts and authorisation of the dividend (whether interim or final) which is signed and dated by the director at the time each payment is made. Indicator publishes ‘Essential Documents for Saving Tax’ which contains an example of draft minutes and written resolution that could be adapted for use.

3. Dividend payment date
•Dividends are treated as paid on the date that the enforceable debt is created; where there is no such debt, the date of payment is used. Therefore the relevant date for an interim dividend is the actual date of payment because a resolution is not needed to confirm payment; such a dividend can be varied or rescinded.
•Note that HMRC consider the date of payment of interim dividends to be the date of entry in the company’s books. (see CTM 20095 (8))
•A final dividend becomes an enforceable debt when approved by resolution therefore the relevant date is the date of declaration unless a later date is specified. (see Potel v CIR (1970) 46 TC 658 and SAIM5040).
•Many believe that backdating documents to confirm consideration of profit and payment of dividend is a paperwork tidying up exercise but technically it is fraud (see ‘Back dated dividends (again) – 12.06.2008 and ‘First Global Media Group Limited v Larkin [2003]’ EWCA Civ 1765)

4. Dividend vouchers
•A single dividend tax voucher covering the whole tax year is permissible.
•Dividend vouchers do not have to be presented at the time of payment.
•The Income and Corporation Taxes (Electronic Certificates of Deduction of Tax and Tax Credit) Regulations 2003 (SI 3143/2003) authorises the electronic delivery of dividends. See the ICSA guide Communications with Shareholders 2007.

The ideal world – summary checklist

See Simon Sweetman's 2007 advice in Tax expert warns of the danger of illegal dividends – a board meeting is no longer needed but written confirmation is vital.

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