Dividend query

System
System Posts: 100,537 🤖 Admin 🤖
edited June 9 in General accounting discussion
I am currently preparing some Limited Company accounts. The sole director has an overdrawn loan account in the region of £22,000.
He has been taking money out of the business almost on a monthly basis, so am sceptical about preparing dividend vouchers for each occasion, as HMRC could interpret this as a salary.
Is it allowable to prepare one dividend voucher at the beginning of the year, and post this to the loan account, so he is drawing from this during the rest of the year?
Another possible problem is that his brought forward profits are around £3,000, with an approx profit for the year of £19,000. Is there a problem with declaring dividends which are greater than the profit for the year, and tight when including the profit brought forward.
I'm sure that this is a simple query, with a simple explanation, but I have searched the web and my library, and am struggling to know where to look! I am due a baby in a couple of weeks, so am blaming it on that!!

Comments

  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Dividend query

    Hi Caz,

    You can vote a dividend at the end of the year and prepare the paperwork as at the year-end. This is common practice.

    In terms of voting the dividend in excess of the profit. You appear to have sufficient accumulated profits from previous years which will allow payment of the dividend. It would only be if his drawings exceeded the profit for the year and the accumulated reserves that you would have to restrict the dividend which would result in an overdrawn loan account.

    However, I would advise your client that he may have to watch his spending if post-tax profits are not going to be in excess of his drawings as this will result in an insolvent balance sheet, which is where the problems start.

    Kind regards
    Steve
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Dividend query

    My thoughts..

    Voting at the year end would still leave a beneficial loan accruing throughout most of the year. Presumably this has not been reported on the P11D for 06/07.

    Declaring a dividend at the beginning of the year is not an option if it did not actually happen.

    I would be inclined to prepare a dividend voucher for each withdrawal. If the director, at the time, withdrew the amounts as a dividend, whether properly recorded or not, then they were indeed dividends and you can draw up the paperwork now. HMRC cannot tell you it was a salary if that was never the intention at the time.

    From the information you provide he has withdrawn dividends in excess of profits, presuming you have not taken the CT liability into account.

    If this is the case then I would complete dividend vouchers up to his maximum withdrawal, the excess will be an overdrawn DLA (disclosure note and loans to participators pages). Get the director to pay the CT personally (before submitting the CT600) or just repay the DLA amount to the company and this will remove the necessity to pay S.419 tax; but still complete the loans to participators pages.

  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Dividend query

    Drawing up dividend vouchers/meeting resolutions for each withdrawal sounds very arduous, however, Dean is right to bring up the overdrawn balance during the year, particularly if the year-end is far away from the tax year-end.

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