dividend question
deborahcarpenter
Registered Posts: 161 Dedicated contributor 🦉
I have a Limited company who have a profit after taxation of around £8500.
However through out the year the director had dividends amounting to £16700 gross (he took them out monthly as well as drawing his basic salary). Is this an illegal Dividend and if so how do i show it in the tax return, do i need to add a note to the accounts stating this information.
Never come across a dividend pay out causing a company to show a negative figure in Shareholders funds?
However through out the year the director had dividends amounting to £16700 gross (he took them out monthly as well as drawing his basic salary). Is this an illegal Dividend and if so how do i show it in the tax return, do i need to add a note to the accounts stating this information.
Never come across a dividend pay out causing a company to show a negative figure in Shareholders funds?
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Are you sure there were no reserves in the company from previous years?0
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No, this was his first year trading!?0
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Deborah,
Presumably the profit after tax figure was after you added back the dividend? If so it highlights what happens when clients take regular dividends without a proper set of interim accounts and lodging a dividend statement in the records. We make sure all our clients get an interim profit and loss account and we provide a statement for shareholders to sign showing that after examination there appears to be an interim profit and that they can distribute some of it in the normal way.
It means there is little risk of your situation happening and protects you. Their idea of a profit is obviously completely different to yours, or the reality of it!
It isn't an unlawful dividend, it just isn't a dividend at all. A dividend is a distribution of profits to the shareholders. If the profit is not shared out in the same proportion as the ownership (unless there is a dividend waiver) or if there is insufficient profit to support it then it isn't a dividend but remuneration which has to be treated for tax accordingly.
That's my understanding, but I am happy to be put right by our more experienced members.
Payrollpro0 -
deborahcarpenter wrote: »I have a Limited company who have a profit after taxation of around £8500.
However through out the year the director had dividends amounting to £16700 gross (he took them out monthly as well as drawing his basic salary). Is this an illegal Dividend and if so how do i show it in the tax return, do i need to add a note to the accounts stating this information.
Never come across a dividend pay out causing a company to show a negative figure in Shareholders funds?
As far as I'm aware, yes that would be an illegal dividend. I'd say the two best ways to deal with it would be to cancel the excess dividends (not sure on the technicalities of that, I must admit) resulting in an overdrawn loan account, which can then be written off - the write off is taxed the same as dividends (i.e. no extra personal tax to pay) but there is NI to pay on the amount written off. Or, you can cancel the divi and vote a bonus instead (but this isn't as good as it'll give rise to both tax and NI).0 -
Ok Next problem!!
My client (the Director) has already had his self assessment tax return done by previous accountant and he declared all the dividends (16700) which makes his tax return incorrect!
He was VERY badly advised by his previous accountant. He is a carpenter and the company is in the CIS scheme, the company was never set up for PAYE (i have done this now), but is it too late to claim back the CIS already paid for tax y/e April 2011? He is also the only employee and sole director so i think this means he falls into the IR35 trap which he also wasnt told about.
Help!!0 -
deborahcarpenter wrote: »Ok Next problem!!
My client (the Director) has already had his self assessment tax return done by previous accountant and he declared all the dividends (16700) which makes his tax return incorrect!
He was VERY badly advised by his previous accountant. He is a carpenter and the company is in the CIS scheme, the company was never set up for PAYE (i have done this now), but is it too late to claim back the CIS already paid for tax y/e April 2011? He is also the only employee and sole director so i think this means he falls into the IR35 trap which he also wasnt told about.
Help!!
Sounds to me like an ammended SA100 might be in order for his personal affairs. As for the CIS, I don't think he should have a problem reclaiming the CIS, but it'll mean doing a P35 for 2010/11 which will be very late indeed and, as far as I'm aware, HMRC would be within their rights to charge a £100 per month late filing penalty even though no payment was due; though in my experience they don't always raise these.0 -
I would not reverse the illegal dividends.
I would just put a note in the accounts saying that inadvertently dividends have been taken which they are not entitled to and that the directors has resolved not to take any more until the company is in a profit situation.
If you redeclare as a loan account and this is overdrawn it will mean penalty tax and possibly should have been declared at p11d time?0 -
Don't quote me on this but, personally, I would reverse the illegal dividends, i.e. raise a post-y/e dividend equal to the after tax profit and submit ammended SA100.
I don't think you should enter any illegal dividends into the accounts because it will make your accounts look wrong, also dividends shouldn't be declared if there isn't the profit in the company.
Any extra drawings over and above the post-y/e dividend, I think, is a loan to the director and the director should pay S419/455 tax at 25% on the overdrawn amount (assuming this amount is not repaid within 9 months of the y/e) + any tax on the interest-free loan benefit.
From my understanding, even if you did decide to show illegal dividends in the accounts, the benefit the director has had from the interest-free loan still appplies as this kicks in once the overdrawn amount is over £5,000 at any point during the year. Crediting the loan account with illegal dividends, I don't think, would help to reduce the overdrawn amount, therefore the benefit-in-kind tax still applies (assuming the overdrawn amount is more than £5,000 at any point during the year).
I don't really deal with CIS but what do people mean when they say "reclaiming CIS"? I thought that CIS is just deducted at source and paid over to HMRC; why would HMRC let you claim it back?
Also, assuming this limited company has 3 or more clients, why would IR35 apply?
Apologises for my dumb questions!0 -
You shouldn't change what has already been done, it's likely that dividends aren't declared properly but even so the intention was there.Don't quote me on this but, personally, I would reverse the illegal dividends, i.e. raise a post-y/e dividend equal to the after tax profit and submit ammended SA100.
It doesn't make your accounts look wrong, it makes the accounts accurateI don't think you should enter any illegal dividends into the accounts because it will make your accounts look wrong, also dividends shouldn't be declared if there isn't the profit in the company.
That is correct if there is an overdrawn loan account already but the interest wouldn't have been calculated accurately for P11d reporting in July. So by changing everything you are then having to declare an incorrect return in July. There are no financial penalties in putting a note in the account stating that dividends have been declared when not strictly due. We have not been told whether there is an overdrawn loan account so penalty tax may not have even applied.Any extra drawings over and above the post-y/e dividend, I think, is a loan to the director and the director should pay S419/455 tax at 25% on the overdrawn amount (assuming this amount is not repaid within 9 months of the y/e) + any tax on the interest-free loan benefit.
From my understanding, even if you did decide to show illegal dividends in the accounts, the benefit the director has had from the interest-free loan still appplies as this kicks in once the overdrawn amount is over £5,000 at any point during the year. Crediting the loan account with illegal dividends, I don't think, would help to reduce the overdrawn amount, therefore the benefit-in-kind tax still applies (assuming the overdrawn amount is more than £5,000 at any point during the year).I don't really deal with CIS but what do people mean when they say "reclaiming CIS"? I thought that CIS is just deducted at source and paid over to HMRC; why would HMRC let you claim it back?
Also, assuming this limited company has 3 or more clients, why would IR35 apply?
Apologises for my dumb questions!
CIS which has been deducted from contractors can be offset against the PAYE bill for limited companies only. That is why they can claim it back, sole traders have to claim it back on their tax returns but limited companies can deduct monthly.
IR35 is complicated and having more than one client isn't the only measure, however 3 or more clients is a strong indication that it might not apply but there are other things to consider as well such as control and substitution.
There have been several discussions on this on accountingweb and the main concensus was to treat it how I have said, it means no amendments to old returns and who is actually going to care about illegal dividends as long as it doesn't keep happening.0 -
On further research, here's the situation:
CA 2006 s847 says that where shareholders have received a dividend from the company knowing at the time that there were insufficient reserves available for the purpose, then they are liable to repay the illegal portion.
However, when directors have paid interim dividends and profitability deteriorates later in the year, the year end financial statements may show a cumulative loss on reserves. Provided the directors had previously substantiated the interim dividend, the liability to repay would not normally arise.
The point, really, is that subsequent events don't change the status of what was, at the time a 'legal dividend'. So if, in the financial year to 31 March 2011 (say, on 1 December 2010) the interim accounts are prepared and there are distributable profits of £10,000, and a £10,000 interim dividend is paid, this would be absolutely fine. If the company then made losses throughout December to March then it wouldn't change the fact that the 1 December dividend was perfectly legal.
The difficulty arises where dividends were paid with no reference to whether or not there were available profits which, if we're honest, is probably the case in many of the businesses who engage our services, even the profitable ones. In which case the payment may well become repayable to the company.0 -
I don't really deal with CIS but what do people mean when they say "reclaiming CIS"? I thought that CIS is just deducted at source and paid over to HMRC; why would HMRC let you claim it back?
Because CIS is just a means of collecting payment of tax, not calculating liability to tax. A subcontractor will generally have 20% of his gross payments deducted to cover his tax, but this will bear no relation to the actual tax liability which will, in most cases, be less than 20% of gross income, so you reclaim the difference.
It's a bit more long-winded than that for a company but the principle is the same.0 -
I'm with BlueWednesday. If they have declared a dividend (and actually declared it/ intended it to be a dividend, not just took money off their DLA) then it is a divdend, albeit an illegal one. It's not a DLA transaction and should not be cancelled.
Just make sure they don't do it again.0 -
Thanks for all your comments guys. I have declared it as a dividend and added a note to the accounts accordingly.
I might get a nice 'uncomplicated' client one day soon!!!???0 -
If at the time of the distribution the member knows or has reasonable grounds for believing that it is so made, [i.e. made in excess of available resevrs] he is liable... to repay it (or that part of it, as the case may be) to the company
I guess if the Director had absolutely no idea whether there were available profits or not you could argue that he neither knew nor had reasonable grounds to know, but if he has no idea then I think you can also argue that he shouldn't have been declaring dividends and that such payments weren't made in good faith.0 -
I guess if the Director had absolutely no idea whether there were available profits or not you could argue that he neither knew nor had reasonable grounds to know, but if he has no idea then I think you can also argue that he shouldn't have been declaring dividends and that such payments weren't made in good faith.
I'd go with the "Well the money was in the bank so I assumed it was profit" line of thinking... It's obvious to us that this isn't necessarily true, but it's not obvious to many, many clients!0 -
I'd go with the "Well the money was in the bank so I assumed it was profit" line of thinking... It's obvious to us that this isn't necessarily true, but it's not obvious to many, many clients!
Yeah okay, I take your point. Don't get me wrong, I'd prefer to be able to call it a dividend in this sort of situation - it's much better for the client! That was just the way I read the legislation, but your point about client attitudes is a good one.
By the way, I don't know if you've read it but I couldn't help but smirk at the AccountingWeb thread on the same subject... my goodness me are there some big egos wanting to win petty battles on there!0 -
Wow you guys, ive just taken on my first client and i know he's been taking monthly dividends (his previous acountant advised him to do this!!) and this thread has really helped me! Thank you!0
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I disagree with much of the above.
I do not believe the directors can merrily call withdrawals from the business a dividend just because there is cash in the bank. A director is expected to know the financial position of the company before declaring a dividend. If there are no profits to distribute then those withdrawals were not a dividend.
If you have a situation where profits were being made early in the year upon which dividends were declared, and subsequently losses were being made, meaning by the end of the year more profit had been distributed than was left in reserves, then that is fine. But I do not think that scenario is particularly common.
The Companies Act rules on this are a bit moot as they are only there to protect minority shareholders.
In your standard scenario of a sole shareholder/director I would report an overdrawn loan account at year end.0 -
I love the debate that comes out of this sort of question. The OP is the only person that has all the facts and the question asked is open to interpretation.
Based on the interpretation of what's been said I agree with everything that has been said so far! Provided a well maintain set of statutory books have been kept I go with what Annette says. However, I would still do what Dean has said:deanshepherd wrote: »In your standard scenario of a sole shareholder/director I would report an overdrawn loan account at year end.
In my opinion, the figures are so wildly different (divis compare to profits) that the Revenue are almost certainly going to make an inquiry into the accounts. I'd go with the reporting of the OD account together with related tax treatment for total protection of the client. It won't make flavour of the month but the client needs educating and will thank you later when the Revenue can't attack him for penalties and interest!
Oh and the 2011 TR needs amending.
Regards
Dean0 -
Isn't interpretation a wonderful thing!!
I would be interested to see if there is an investigation, I have had to do it with clients a couple of times and nothing as of yet (touching wood just in case) - I suspect that HMRC don't have the staff to follow it up!0 -
In the immortal words of Whitney Houston.
"It's not right, but it's ok.."0 -
Bluewednesday wrote: »You shouldn't change what has already been done, it's likely that dividends aren't declared properly but even so the intention was there.
It doesn't make your accounts look wrong, it makes the accounts accurate
Hi Blue Wednesday
Thanks for the post, especially all the good info regarding IR35 and CIS.
Regarding the "It doesn't make your accounts look wrong, it makes the accounts accurate", I would liken illegal dividends creating negative reserves with a negative petty cash balance. For example, you should only take dividends from profit so taking dividends when there is no profit would make the accounts look wrong; a bit like showing a negative petty cash balance, i.e. taking petty cash when there is no cash. What are your thoughts? Do you agree?0 -
No I don't agree, it is fully possible to have negative reserves.
It all depends on the situation as to what treatment that you give something, as somebody further down has said that you may over draw a dividend, if there were profits int he company mid year and then subsequently losses. With management accounts backing it up it's not an illegal dividend but it will result in overdrawn reserves.
Glad to help re CIS and IR35 although frankly IR35 scares me to death! I know the theory but would never advise on it!!!0 -
deanshepherd wrote: »In the immortal words of Whitney Houston.
"It's not right, but it's ok.."
Are you sure you want to admit to knowing Whitney Houston songs????0 -
I'd rather admit that than admit letting client's off the S.419 tax on a dividend that wasn't...
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Touche - ha ha!
(Just wish I was clever enough to put an e acute in properly)0 -
deanshepherd wrote: »I'd rather admit that than admit letting client's off the S.419 tax on a dividend that wasn't...
and don't forget letting the client off paying the benefit-in-kind tax at any point where the interest-free loan was over £5,000 ;D0 -
All depends what paperwork there was, that's what we don't know! I made my comment assuming some (if not the correct) paperwork.0
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And I concurred on the same basis.Bluewednesday wrote: »All depends what paperwork there was, that's what we don't know! I made my comment assuming some (if not the correct) paperwork.
For the record, I'll usually put an overdrawn DLA in, unless the client was one who 'got' the concept of declaring dividends and I'd be happy to argue it over the table with HMRC.0
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