Dividends
The following check-list sets out points to consider whenever you want to issue dividends.
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 If regular amounts have been withdrawn (including the monthly payments our clients all insist on drawing in lieu of salary) then the amounts are deemed ‘illegal’ if at the date of each payment the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has been paid ‘illegally’ then CA 2006 s847 provisions apply and the directors will be expected to repay the amount withdrawn.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 531and ‘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 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.
Process
The correct process is not difficult once understood. The company must complete and document the process when declaring dividends. Attempts to create the necessary documentation retrospectively are fraud and would invalidate the dividend.
1. Declare an interim or propose a final dividend in meeting of directors
2. For finals only, shareholders resolve to approve the dividend.
3. Prepare the documentation:
a) Minutes to the meeting
b) Shareholders approval for finals
c) Dividend vouchers – not essential for interims
d) Entry in dividend register
4. Prepare the documentation: Minutes to the meeting
5. Directors, secretary and shareholders sign the documents
6. File minutes and resolutions, distribute vouchers to shareholder
7. Pay or journalise dividend
