Paying dividends from a limited company
We're often asked what the most tax efficient way to be paid from a limited company is. In fact, we put together whole news articles on it. Inevitably, dividends feature in any such discussion. But unlike salary or repayment of a Director's loan, dividends need a Board resolution and dividend voucher. And there has to be net profits to support it.
HMRC are increasing looking at dividends and the associated documentation. Some individuals and companies have lost at tax tribunals for neglecting the paperwork. A tribunal remarked in one case: 'There had not been any directors' meetings at or resolutions in which any of these amounts had been declared as dividends.' The tribunal held that the amounts were, in consequence, not dividends but earnings. Thus HMRC were entitled to recover PAYE Income tax and National Insurance from the directors personally.
Make sure dividends are paid from profits
Company law (s830 Companies Act 2006) says that a company is only entitled to make distributions out of profits available for the purpose.
The law defines "profits" in this context as accumulated realised profits minus accumulated realised losses. The Act also requires that a dividend is supported by relevant accounts demonstrating that profits are available for distribution.
- For a year-end dividend, the statutory accounts are likely to be the relevant accounts
- For interim dividends, directors are called upon to make what the law calls 'reasonable judgment' of the current financial position of the company, and its ability to meet debts as they fall due.
Directors need to take the responsibility to ensure dividends can be paid from profits very seriously. Where shareholders receive a dividend, knowing at the time that there were not sufficient reserves available, they can become liable to make repayment; company directors may also become personally liable.
What documents do we need?
To pay a dividend lawfully, the directors need to follow the correct procedure;
- Establish the amount of distributable reserves. This means preparing either management accounts or rough profit figure based on sales less expenses less 20% of the profit for corporation tax and adding this to the profit and loss account reserves from your last accounts. This gives you the maximum amount that could be paid as a dividend.
- Decide how much dividend is to be paid. Even if you decide not to pay in full in cash at the time, you can credit this to your director's loan account and pay it later. Hold a board meeting of the directors and prepare minutes of the meeting to approve payment.
- Make payment to the shareholders and prepare dividend vouchers. If no actual payment is made, your accounting records must be updated on the date of the dividend paperwork to record the dividend.