Are your Dividends Watertight?

We have so many of our customers operating under Limited company structures and taking advantage of the tax benefits of withdrawing money as dividends, either in whole or in part, that it seemed like a good time for a general reminder of the Do’s and Don’ts when drawing dividends.

Get the steps correct, then there’s a real benefit; pay undue attention to the steps, and you could be storing up problems (and expense) if ever reviewed by HMRC.

The Basics

  • Dividends are paid to shareholders (not directors), and are paid in accordance with  the number of shares  held and the rights pertaining to those shares
  • Dividends can only be paid from a company’s retained profits – if a company has no profits, no dividend can be paid
  • Dividends are voted by the Board of Directors as the executive of the company

Do’s

  • Do ensure that the company has sufficient retained profits from which to cover the proposed dividend.  This usually means drawing up some sort of management accounts, allowing for liabilities which are accruing but which may not yet be recorded in your bookkeeping system (e.g. corporation tax, accrued expenses, depreciation on fixed assets).  Retained profits brought forward from prior financial periods can be utilised for current year dividends
  • Do document the Board’s decision to declare a dividend by way of a Board minute, produced prior to payment of the dividend
  • Do ensure that dividends are paid in accordance with the rights of all shareholders; shareholders with equal numbers of shares of a particular class all receive the same dividend amount
  • Do issue dividend tax vouchers to all shareholders at the time of payment.  These tax vouchers are required for the shareholder’s personal tax records

Don’ts

  • Don’t draw money from the company bank account into a personal bank account without knowing in advance whether it is remuneration, dividend or refund of expenses
  • Don’t rely on having access to dividends unless you are 100% sure of the availability of profits.  Dividends drawn where no profits exist may have to be backed out, with costly tax implications on either the company, the individual or both
  • Don’t decide to catch up on the paperwork at a later date!  We all know that if something is left until later, the chances are it will not get done.  Dividend paperwork (Board minutes and tax vouchers) need to be contemporaneous and their absence will call the validity of any dividends into question

In summary, if you are on top of your company’s financials it should be easy to monitor the availability of profits.  And if you follow some simple paperwork procedures at the point of declaring your dividend, it should stand up to anyone’s scrutiny.  The benefits can be significant, so perhaps an area that might be worth a fresh look and a determination to do it right!