Dividends – ‘Belt-and-Braces’

Dividends are a frequent topic of conversation with clients and even more-so over recent months, given the imminent introduction of higher rates of tax on dividends from 6th April 2016.

With this in mind, it is perhaps worthwhile reminding ourselves of the specific requirements for the payment of dividends to ensure they fully comply with relevant company law and taxation regulations.

Dividend payments do not solely rely upon a company having sufficient distributable reserves, although this is the most common reason that a dividend may be treated as unlawful.

A company director cannot draw money from a company and then after the event determine that this was a dividend. The dividend must be declared first before making the payment. The key Companies Act requirements for payment of dividends are as follows:-

  • Consult the Memorandum and Articles of Association of the company to ascertain who is authorised to declare a dividend
  • Directors can authorise payment of interim dividends but final dividends need to be approved by ordinary resolution confirmed by a simple majority of shareholders
  • Dividends may only be paid out of profits available for the purpose, comprising of accumulated realised profits

Preparation of the following documentation is essential for payment of dividends:-

  • Minutes of the directors’ Board meeting to evidence the resolution to pay an interim dividend
  • Minutes of both the directors and shareholders in General Neeting to evidence resolution to pay a final dividend
  • Dividend vouchers to be produced to document the dividend received by the individual and to ensure compliance with Section 234A ICTA 1998 such vouchers should be sent to the relevant shareholders

Dividends can be a complicated area but it is imperative that all payments should be supported by the correct evidence. Dividend documents should be produced in a timely fashion, and not, under any circumstances, backdated.

Where amounts are advanced to directors without being matched by dividends, then the directors are deemed to have overdrawn loan accounts with the company. Where loans to participators are not repaid within 9 months of the year end, S455 tax is payable at 25% of the balance outstanding.

If S455 tax has been paid and the loan is subsequently repaid (e.g. through the payment of a dividend), the S455 tax can be claimed back 9 months after the end of the accounting period in which the loan was repaid.

Additionally, drawing regular amounts from the company without dividends voted in advance could be classed as a beneficial loan; the benefit being the interest foregone when compared to an equivalent commercial loan. HMRC may challenge the interest free nature of any overdrawn loan account held and seek to collect interest through Class 1A National Insurance contributions.

Whilst none of the above is particularly troublesome, it is perhaps a suitable time to carry out a review of dividend procedures in light of the higher tax rates and perhaps an increased level of scrutiny that might be placed on dividend payments from 6 April 2016.

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