Dividends, documentation and downright disasters

The arrival of a Technical Bulletin from ICAS is a warning that whilst "low salary, high dividends" is often the best way to extract funds from your limited company, there are still hoops that need to be jumped through with dividends, as there are with PAYE.  There are two types of dividend - interim ones that are paid by the directors, and final ones that are declared at a meeting of members.

But first, can you pay a dividend at all?  The directors can declare an interim dividend anytime, but only out of the profits available for that purpose. So what care has been taken to make sure that there are reserves, and how has that been documented?

Second, when is an interim dividend actually paid?  HMRC's view is that there is no distribution until either it is paid, or the funds are placed unreservedly at the director's disposal. So if it is via a loan account, how is the credit to the director's loan account evidenced? Or rather when is the credit evidenced?  That can't be done retrospectively. And in this day and age, accountants can't become involved in jiggery-pokery (technical term) over the dates.

A final dividend, of the other hand, is slightly easier.  The relevant date is when it was declared. It might actually go thorough the bank later - it doesn't matter. The payment is legally eforceable and shareholder becomes a creditor when the dividend is declared, and that is the date it goes through the books and goes onto the recipient's tax return.

And then along comes section 847 of the Companies Act 2006. It is not just the director who pays the unlawful dividend that has a liability.  The member receiving the dividend is liable to repay it if he knows or has reasonable grounds to believe it is paid in contravention of Part 23 of the Act.

So we need to get things right with dividends, and with the paperwork surrounding them. Or it could be a disaster!

Some people don't like change, but you need to embrace change if the alternative is disaster.(Elon Musk)