Dividend larger than a profit
- Thread starter Ross poldark
- Start date
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Here is some more info for you:
https://www.taxinsider.co.uk/illegal-dividends-how-they-arise-and-what-to-do-about-them
https://www.taxinsider.co.uk/illegal-dividends-how-they-arise-and-what-to-do-about-them
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You can't pay a dividend if you don't have the distributable reserves to support it (retained profits)
The distribution is treated as a loan and you then have to consider whether the special rules for taxation on Directors Loans will apply.
You definitely need to seek a new accountant.
The distribution is treated as a loan and you then have to consider whether the special rules for taxation on Directors Loans will apply.
You definitely need to seek a new accountant.
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S
Shirin Fareed
A dividend can be more than the current year's profit.
But it cannot be more than the profit reserves - this is shown in the balance sheet, just under Share capital. Profit reserves are the previous years' profits less any previous dividends.
If the dividend was more than the profit reserves, the company would end up with negative reserves. As mentioned it is illegal to declare a dividend which exceeds the profit reserves.
This situation is avoided by preparing an up to date set of accounts. Look at the profit reserves on the balance sheet. This is the maximum you can withdraw as a dividend.
But it cannot be more than the profit reserves - this is shown in the balance sheet, just under Share capital. Profit reserves are the previous years' profits less any previous dividends.
If the dividend was more than the profit reserves, the company would end up with negative reserves. As mentioned it is illegal to declare a dividend which exceeds the profit reserves.
This situation is avoided by preparing an up to date set of accounts. Look at the profit reserves on the balance sheet. This is the maximum you can withdraw as a dividend.
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surely it would be an unlawful one, and therefore would be an overdrawn DLA, repayable to the Company?
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I think it looks like the OP does not have an up to date balance sheet. nor knows enough about the accounts to be able to sort it out.
@Ross poldark what does the "capital and reserves" section of your last balance sheet look like?
Get an accountant to work out the actual position. Its quite possible that it was paid out of distributable reserves.
@Ross poldark what does the "capital and reserves" section of your last balance sheet look like?
Get an accountant to work out the actual position. Its quite possible that it was paid out of distributable reserves.
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NicoJ
There's a debate on this, often comes up on AccountingWeb. Some accountants will reverse the dividend entry and put it to DLA (Spur Support has suggested that above) whilst others follow the view of STDFR33 that a dividend is a dividend despite its declaration being unlawful. If you've got the correct paperwork drawn up and signed it is difficult to see how HMRC can call it something else.
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NicoJ
I've never really made my mind up to be fair. I can see both sides of the argument, if you're keeping on top of your clients it should be a rare occurrence really.
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I agree with STDFR33. The payment remains a dividend for Income Tax purposes in the hands of the recipient, and therefore it should be entered on his/her relevant Tax Return. That would be the HMRC view, I suspect.
However for accounting purposes I would guess, and I am open to correction if wrong, that it would need to be rectified as it would be contrary to Company Law if allowed to stand.
However for accounting purposes I would guess, and I am open to correction if wrong, that it would need to be rectified as it would be contrary to Company Law if allowed to stand.
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I take the same view as STDFR33. I dont see how you can re-write history, that said I've never had a situation where a dividend has been anything more than a few hundred pounds in excess of the maximum payable. I've also never had this challenged by HMRC.
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NicoJ
As I said, I can see both sides of it. I've seen it compared to a negative petty cash balance, you can't declare a dividend out of no profit.
It also depends on what has happened, if they are just withdrawals from the company bank account labelled "dividends" are they really dividends? And are you rewriting history by classing them as directors loan account payments? Also, is the company solvent so the minor slip is going to rectify itself in the next year?
As I said, never really made my mind up. Dividends can divide accountants opinions, seen it many times.
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Is this something to do with capital assets?
I use Freeagent, and it tells me there is way more distributable profits than the business could ever afford to pay, and it is something to do with capital assets purchased. Ie it judges that the value of an asset is actually distributable as profit, even though it's not liquid in the business.
Anyway, don't know if it is something related, but it's always raised my eyebrow.
I use Freeagent, and it tells me there is way more distributable profits than the business could ever afford to pay, and it is something to do with capital assets purchased. Ie it judges that the value of an asset is actually distributable as profit, even though it's not liquid in the business.
Anyway, don't know if it is something related, but it's always raised my eyebrow.
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@jimbof that is exactly the sort of issue I think night be confusing the OP.
In the situation you describe you are talking about you can legally distribute the money even if its not good business to do so. I think the accountants have got too interested in technical issues to explain it simply. Maybe this explains: https://moneyterms.co.uk/distributable-reserves/
In the situation you describe you are talking about you can legally distribute the money even if its not good business to do so. I think the accountants have got too interested in technical issues to explain it simply. Maybe this explains: https://moneyterms.co.uk/distributable-reserves/
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