Everything you should know about paying dividends
Dividends are payments made by a company to the shareholders if it has made enough profit. For the very small owner/manager business, dividends will form the bulk of their income and so must be managed carefully.
The Companies Act 2006 has very clear definitions of :
- profits available for distribution by a dividend and,
- the accounts required in order to justify dividend.
Dividends can only be paid out of distributable profits – these are lawful dividends. If the dividend does not meet these conditions they are considered to be unlawful, illegal or ultra vires dividends.
A dividend is considered unlawful, if it does not satisfy the requirements of the Companies Act 2006.
The requirements are:-
- A company may only make a distribution out of profits consisting of:
- Accumulated profits after all expenses and tax liabilities have been accounted for
- Less any losses carried forward.
- A distribution is required to be justified by reference to the company’s:
- last annual accounts, or
- interim accounts.
What are the implications of paying an unlawful dividend?
- Unlawful dividends should be repaid to the company if that is not:
- Where the unlawful dividend was paid to a director or a shareholder, and not repaid to the company, it is treated as a directors loan. If the directors loan account is overdrawn 9 months after the period end, an additional 32.5% S455 corporation tax charge is payable.
- Where a director or an employee has an unpaid loan over £10,000 there will be a taxable benefit in kind in respect of the interest not being charged on the loan. These will need to be reported to HMRC on a P11D – even if that means a late submission and late filing fees.
Frequency of dividends
Dividends can be declared during the year say quarterly or monthly (interim dividends) or they can be declared at year-end (final dividends).
In order to justify an interim dividend you must produce an interim set of accounts with adjustments for stock, work in progress, prepayments and accruals, amortisation and depreciation, provisions for probable and actual bad debts. Your interim accounts will help you determine whether you have enough distributable profit to declare an interim dividend.
Final dividends are declared at year-end once the annual accounts are completed, assuming there are enough distributable reserves to justify paying dividends.
There are no rules that set out when or how often dividends should be distributed, this decision is made at the discretion of the company directors. The only thing you must remember is that the dividend must be legal and that there must be sufficient distributable profits when paying dividends.
The advantage of declaring and paying dividends monthly or quarterly is that in order to do so you must have produced interim accounts.
Having those up-to-date interim accounts should ensure that you don’t take more money out of the business than you are allowed.
In some instances it may be beneficial for one or more shareholders to waive their rights to receive a dividend, this allows the dividend to be paid to some but not all shareholders.
HMRC are not overly keen on dividend waivers so talk to your accountant before you put this in place.
Dividends – paperwork and admin
The Companies Act 2006 requires all companies to hold a board meeting to agree that dividend declaration and records the meetings minutes in the company’s records.
The minutes need to specify if this is an interim or final dividend. It doesn’t need to be called special or advance, and you don’t need to define it as being paid from reserves or current year profits. It’s simply interim or final in this financial year.
Minutes of the Board Meeting of the Company held at [Meeting Time] on the [Date]
IT WAS RESOLVED
THAT an interim dividend of [Net Per Share] per [Share Class] share in respect of the year ended [Date of Accounts Period End], be and is hereby declared payable on [Dividend Payment Date] to those shareholders registered at close of business on [Dividend Declared Date].
There being no further business, the meeting was declared closed.
Chairman – [Meeting Chairman]
This may seem pointless if you are running your company as a sole director, but it is required by the Companies Act 2006 and demonstrates (in line with your obligations as a Director) that you have considered the financial position of the company before declaring a dividend.
Particularly important if you are paying dividends to yourself. Your company is a separate legal entity in its own right. Even though you may have ‘earned’ the money that comes into your business, it belongs to your business – not you. As a director you have to act in the best interests of the business and that may include NOT paying you, so that your company can pay HMRC or trade suppliers.
The director must also provide each shareholder with a dividend voucher to confirm the dividend payment made to each shareholder.
Sample Dividend Voucher
| [COMPANY]Dividend on[Nominal Value] [Share Class] SharesTax Voucher
[Number Of Shares] [Share Class] [Share Value] of [Nominal Value] each
Director / Secretary