MJ News - 02/12/04

Dividends - The Least You Need To Know

What is a dividend?

A dividend is a distribution of the profits that a company has generated. Therefore a dividend can only be paid when accumulated profits are available.

Dividends are paid to the shareholders of a company.

There are two types of dividends, interim and final.

Interim Dividend

Interim dividends are declared by the directors from time to time throughout the year and they can only be paid if the company's articles permit the directors to declare a dividend. Lack of such express power is unusual but it is worth checking.

For a dividend to be legal there must be profits available and directors declaring a dividend have a responsibility to ensure that there are sufficient profits available for distribution. To do this, the directors are required to make a reasonable judgement of the position before they pay an interim dividend. Evidence should be kept to substantiate the directors' judgement.

Final Dividend

A final dividend is approved by the shareholders of the company at an AGM.

If a company has an elective resolution in place to dispense with annual general meetings only interim dividends can be paid.

When Is A Dividend Paid?

A final dividend is deemed to be paid at the date the resolution declaring the dividend is passed or at a later date if specified in the resolution.

Interim dividends are not due and payable until they are actually paid. The date of any resolution is irrelevant. Where the dividend is physically paid by cheque or bank transfer there is no problem in identifying the date. Often however, a dividend is credited to a director's loan account. The date of such a payment is the date the dividend is entered in the accounting records.

Why Is The Date Of Payment Important?

The date a dividend is paid determines the tax year in which the recipient declares the income in their tax return. Getting the income in the wrong tax year could result in more higher rate tax being paid than is necessary. It could also result in the tax being paid sooner than is necessary.

If a dividend is declared to repay an overdrawn directors loan account and there is a delay in entering the transaction in the accounting records, the loan account could remain overdrawn longer than intended and this could give rise to a S419 liability of £25% of the overdrawn amount.

Getting the date a dividend is paid wrong can have catastrophic effects on cash flow and tax liabilities so it is vital to get it right first time every time.

Why Is The Documentation Important?

Minutes of board meetings at which dividends are declared provide proof of the decision to pay a dividend.

Shareholders require dividend vouchers as evidence of their entitlement to the tax credit on the dividend.

The payment of an unlawful dividend can have very serious tax consequences as the Inland Revenue could regard the payments as loans to the shareholders, which may trigger a charge of 25% and possibly interest and penalties.

Practical Solutions

1. Always pay a dividend as soon as it is declared.
2. If the purpose of the dividend is to repay a director's loan account, pay the dividend into the director's personal bank account and then immediately pay the money back to the company.
3. Make sure that the dividend paperwork is correctly prepared at the time of the dividend payment and kept on file.

If you need any help with dividends please do not hesitate to contact us for further information.

We provide a dividend documentation service for £25 plus vat for each dividend declared or you may prefer to use our dividend spreadsheet, which will enable you to prepare your own documentation for £75 plus VAT.

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© Copyright Maidment Judd 2004 - 2006. All rights reserved. This information has been produced for general interest. It is therefore essential to take advice on specific issues. We are unable to take responsibility for any outcome resulting from acting upon, or refraining to act upon, this information.