To restate dividends or not?

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Monsoon
Monsoon Registered Posts: 4,071 Beyond epic contributor 🧙‍♂️
A client and I have realised after the fact, that they included turnover of a second company in with their first company. Wrongly. Due to a number of things, this wasn't brought to my attention until after the accounts and CT600 were filed.

For the record, the client didn't discuss Company 2 with me until well after it was established, so I was only working on the information provided. That and they are always reasonably last minute with their information.

I've extracted Company 2's figures from the accounts and have re-stated the accounts already submitted. I'm just preparing the tax return.

With a chunk of profit missing (belongs to Co 2), the P&L account is now overdrawn - dividends were drawn on profit as it originally stood.

Do I restate the dividends, or are they illegal dividends that stand, and will be absorbed into the first few months of the next financial year.

This one has been so much of a headache to unravel that I can't see the wood for the trees.

Thanks.

Edit to add: in case it's relevant, there was already s455 tax payable on the original return

Comments

  • Bluewednesday
    Bluewednesday Registered Posts: 1,624 Beyond epic contributor 🧙‍♂️
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    As the dividends were declared etc I wouldn't restate them.

    Maybe just put a note in the accounts that this just occured as a one off and their is enough profits int he following year to absorb them.

    At the end of the day the dividends will be illegal but who is going to follow that up?
  • Monsoon
    Monsoon Registered Posts: 4,071 Beyond epic contributor 🧙‍♂️
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    Thanks BW. That was my gut feeling. This whole thing is just convoluted and I just hope HMRC don't pay too much attention as they could have a field day!
  • Newbie
    Newbie Registered Posts: 229 Dedicated contributor 🦉
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    I disagree, dividends can only be paid out of profits or reserves, otherwise its an overdrawn DLA or salary in HMRC's eyes, both incurring charges, have you also considered if its a BIK on the loan benefit. I may have misinterpreted your posting apologies if so.
  • Monsoon
    Monsoon Registered Posts: 4,071 Beyond epic contributor 🧙‍♂️
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    There are constant divided opinions on this.

    Yes, a company can only declare divs out of post tax profits. However, if a div has been correctly declared, and then a future event changes the P&L account, the div still stands as it was correctly declared at the time. I think that is what BW was getting at, and where my first line of thinking was going.

    The spanner in these clear cut works is that these dividends were not 'traditionally' declared from accurate management accounts (see above: client provides info quite late as does a years bk in one go, as far as I can tell). As such we rely on the "remuneration was always intended to be salary plus dividends and a DLA is not allowed to go over £5k at any one time, and thus dividends are deemed declared as taken" route, which came up relatively recently (funnily enough with the same client) with Dean Shepherd, who furthered this approach when needed (if I remember correctly).
    Edited to add: link: http://forums.aat.org.uk/showthread.php?t=31015

    So, essentially, dividends were finalised when I prepared the accounts, and thus the is scope for restating them, hence the OP.

    I want to do what is correct, and indeed what is going to raise the fewest alarm bells with HMRC.

    The amounts are not over £5k so no BIK; s455 is already in place and paid.
  • Bluewednesday
    Bluewednesday Registered Posts: 1,624 Beyond epic contributor 🧙‍♂️
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    I found almost exactly the same question on accounting web and the general consensus was that if dividends is what they are then they go in the accounts regardless. Should HMRC see them differently is up to them, you can't change the nature of the transaction but a note should go in saying that there are illegal dividends which won't happen again or words to that effect.

    http://www.accountingweb.co.uk/anyanswers/illegal-dividends/476116

    Further to Newbie's post as long as there were profits when the dividends were declared, subsequent losses do not make them illegal, even if it looks so at the end of the year. As Monsoon says they do have to be properly backed up with management accounts should you wish to rely on this!!
  • Monsoon
    Monsoon Registered Posts: 4,071 Beyond epic contributor 🧙‍♂️
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    Thanks BW, that's my understanding also.

    In this case, the muddying of the waters is that the divs were declared on the basis of profits of Co 2 as well, being incorrectly included in Co 1's accounts which was the belief of the directors at the time, but wasn't actually the reality, due to a misunderstanding of these things, and the fact that I wasn't kept fully in the loop. That's why I'm having a sticking point on it...

    I think I'm going to go with keeping them in and seeing what happens. It's a bit of a nightmare either way! Be nice if clients told us everything up front and not have to fix things after the fact....
  • stefanboro
    stefanboro Registered Posts: 187 Dedicated contributor 🦉
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    Should HMRC see them differently is up to them

    Haha yes but when preparing my clients accounts what HMRC will see is always at the forefront of my mind.

    To be honest, my initial reaction is to DLA the extra payments and declare S455 but if people have put them down as illegal dividends with a note and HMRC have have let it slide then great.

    I know I will be researching this all weekend now.....
  • Monsoon
    Monsoon Registered Posts: 4,071 Beyond epic contributor 🧙‍♂️
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    I've seen a large commercial accoutning firm that specialises in Contractors submit accounts with an overdrawn P&L/ illegal dividends. It happens.

    I've got a Queen up my sleeve (it's not an Ace, but it's not bad): declare the divs in company 2, and leave unpaid for now, and if HMRC want to query Co 1, then the director is already entitled to the money and it won't be o/d DLA.

    Joy...
  • Newbie
    Newbie Registered Posts: 229 Dedicated contributor 🦉
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    Interesting post, have you tried calling the ICAEW technical advice line, not certain if they would cover this but would certainly be nice if it did.
  • Monsoon
    Monsoon Registered Posts: 4,071 Beyond epic contributor 🧙‍♂️
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    I've not called an advice line yet, no. I've lost track what's available via AAT these days.
  • deanshepherd
    deanshepherd Registered Posts: 1,809 Beyond epic contributor 🧙‍♂️
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    In my humble opinion, if dividends have been properly declared and only exceed profit because either:

    i) There was a downturn in trade in the latter part of the year that lead to profits decreasing; or

    ii) Unanticipated adjustments in the final accounts lead to dividends exceeding profits.

    Then there is no problem with dividends exceeding the P&L balance, if you so choose.

    In this case I would suggest that the dividends were not even properly declared. I would not have a problem 'repaying' those dividends in the accounts and think it preferable to having a suspiciously negative P&L reserve.
  • Monsoon
    Monsoon Registered Posts: 4,071 Beyond epic contributor 🧙‍♂️
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    Thanks for your thoughts Dean, I appreciate it.

    Revising the dividend figure also throws up red flags about the validity of the dividends - but then, I have warned them about their methods.

    I'm still on the fence about this, but need to make a decision soon. To be fair, I think it could be argued either way. I wish all clients were straightforward...
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