Query about HMRC wording regarding payment of dividends

[last of the summer wine]

Hi,
A director pays himself minimal salary and a dividend each month. The company has not yet been trading for a full accounting year. On the HMRC website it states "Your company must not pay out more in dividends than its available profits from current and previous financial years". Is this the available profit figure at any one time or what it stands at come year end. For example if the director has already received, say, £10,000 in dividends so far and the current retained profit is £9,000, does that mean he can't take a dividend that month? Hope this makes sense!
Thanks.

 

[DWS]

Do you mean that the profits are £19,000 and the Director has already taken Dividends of £10,000 leaving £9,000?
If so you need to calculate the Corporation Tax on the £19k and then what is left after the £10k already distributed can be issued as dividends.

 

[Elliot Green]

You declare a dividend with reference to 'relevant accounts'. You declare a dividend and then you can pay it if you have sufficient distributable profits/reserves.

Using your example it would appear that the Director has paid out dividends in excess of the distributable profits/reserves.

You cannot take dividends in anticipation of profits in the future - see the case of First Global Media Group Limited v Larkin [2003] EWCA Civ 1765 which demonstrates that directors cannot take monies in advance of dividend declarations and then later claim the drawings were in fact dividends. This is a common error in paying dividends.

In Bairstow & Ors v Queens Moat Houses Plc [2001] EWCA Civ 712 the relevant accounts were said to be rather important:

… the requirement that any distribution should be made only in accordance with a company’s financial statements, drawn up in the proper format and laid before the company in general meeting, cannot be regarded as merely a procedural technicality

 

[last of the summer wine]

@DWS: Thanks for replying so quickly. For example in round figures, dividends paid so far is £20k. The current retained profit figure is £19k (after deducting 19% for CT and the £20k dividends already paid so far.) So, does the HMRC wording mean that a divi should not be paid, as the £20k already paid (over the last few months, not in a lump sum) is more than the current retained profit figure of £19k, or is it based on the year's retained profit figure, not the daily/monthly figures?

 

[WaveJumper]

Possibly time to think about engaging an accountant

 

[DWS]

If you have 19k left after deducting C/Tax and after the dividends already distributed, then you can still issue dividends up to 19K

 

[DontAsk]

It wouldn't be a good idea though, would it, pest way through a year.

 

[Elliot Green]

If you have 19k left after deducting C/Tax and after the dividends already distributed, then you can still issue dividends up to 19K

Relevant accounts are *relevant*!

 

[Elliot Green]

It wouldn't be a good idea though, would it, pest way through a year.

Model Articles when applicable permit interim dividends as follows:
30.—(1) The company may by ordinary resolution declare dividends, and the directors may decide to pay interim dividends.

 

[last of the summer wine]

Possibly time to think about engaging an accountant

We have one, thank you.

If you have 19k left after deducting C/Tax and after the dividends already distributed, then you can still issue dividends up to 19K

Thank you DWS. I thought (hoped) that was the case but started over-thinking it!

 

[last of the summer wine]

I'm even more confused now! DWS says yes, Elliot Green seems to say no.
Thanks anyway to all who took the time to reply.

 

[Elliot Green]

I'm even more confused now! DWS says yes, Elliot Green seems to say no.
Thanks anyway to all who took the time to reply.

You have to be careful with dividends because if for any reason the company were to go into insolvent liquidation you *could* find a liquidator clawing the dividends back, either on the basis that they were unlawful or what is called in insolvency terms a Preference (when you are put into a better position to other creditors) for example only. The rules on dividends are very strict indeed. You need to be able to show that when you declared the dividend you did not put company creditors at risk and you were solvent taking account of all liabilities.

 

[DWS]

Perhaps Elliot Green can explain then why if you have retained earnings of £19k you can not issue a dividend

 

[Elliot Green]

Perhaps Elliot Green can explain then why if you have retained earnings of £19k you can not issue a dividend

I have not said yes or no. I have highlighted a procedural point to consider from Bairstow & Ors v Queens Moat Houses Plc [2001] EWCA Civ 712

… the requirement that any distribution should be made only in accordance with a company’s financial statements, drawn up in the proper format and laid before the company in general meeting, cannot be regarded as merely a procedural technicality

 

[last of the summer wine]

You have to be careful with dividends because if for any reason the company were to go into insolvent liquidation you *could* find a liquidator clawing the dividends back, either on the basis that they were unlawful or what is called in insolvency terms a Preference (when you are put into a better position to other creditors) for example only. The rules on dividends are very strict indeed. You need to be able to show that when you declared the dividend you did not put company creditors at risk and you were solvent taking account of all liabilities.

Solvent and no creditors put at risk. It's only ever a very small dividend taken but I hope I'm right in thinking that as long as the divi taken does not exceed the available retained profit, (i.e. if there's only £10k profit you can't take £11k in a divi), we'll be OK ?but I will run it past the accountant. Thanks again to all who came back to me over this.

 

[WaveJumper]

Impossible to know the full details of your balance sheet here however whilst its ok to pay yourself a dividend from your profits is fine, a raised eyebrow from some of us thinking you maybe sailing very close to the wind. if you suddenly had a down turn for a couple of months and things were suddenly looking not quite so favourable would you then find yourself in a bit of a sticky situation.. As I said only you and perhaps your accountant would know the answer to this.

And thank you @Elliot Green for giving me a mountain to climb reading that case thank god they never added the further 500 pages the ruling seems to have generated.

 

[Newchodge]

I think you need to start at the beginning. Calculate your profit for the year, deduct CT. The amount left is available for distribution as dividend. Through the year you may have issued interim dividends (OK if they are less than interim profit minis CT). Deduct any interim dividends paid in the year and what is left is available for dividend payment.

 

[MyAccountantOnline]

The way to ensure you dont pay illegal dividends is to keep good accurate and up to date records and use them to see how much dividend can be paid before you take a dividend.

 

[Elliot Green]

Impossible to know the full details of your balance sheet here however whilst its ok to pay yourself a dividend from your profits is fine, a raised eyebrow from some of us thinking you maybe sailing very close to the wind. if you suddenly had a down turn for a couple of months and things were suddenly looking not quite so favourable would you then find yourself in a bit of a sticky situation.. As I said only you and perhaps your accountant would know the answer to this.

And thank you @Elliot Green for giving me a mountain to climb reading that case thank god they never added the further 500 pages the ruling seems to have generated.

If you follow the procedures strictly and when you draw up your balance sheet in accordance with the rules, then provided you do not overlook prospective probable liabilities and you do make provision for them in the balance sheet, then what happens later *may* not be the issue even if things go South. A lot of people forget about contingent liabilities and that can easily cause a breach of the rules of capital maintenance.

 

[Paul Kelly ICHYB]

@last of the summer wine As you have an accountant, what did they advise?

 

[DontAsk]

Model Articles when applicable permit interim dividends as follows:
30.—(1) The company may by ordinary resolution declare dividends, and the directors may decide to pay interim dividends.

I stand by my statement that it may not be a good idea part way through the year. What happens when you get to year end and there are actually insufficient retained profits for the dividends you have already paid.

 

[last of the summer wine]

@last of the summer wine As you have an accountant, what did they advise?

I've been backwards and forwards with them for a couple of hours and I've just got an answer. Because we are not through our first year of trading yet, (probably should have mentioned that in my first post, sorry but didn't realise it made a difference!) and there is no b/f figure, when the accounts are prepared he won't have exceeded the distributable amount.

Again, thanks to all who took the trouble to respond.

 

[DWS]

I stand by my statement that it may not be a good idea part way through the year. What happens when you get to year end and there are actually insufficient retained profits for the dividends you have already paid.

As long as there are sufficient retained earnings in the Company when the interim dividends were distributed then it does not matter if at the end of year dividends distributed are more than profits it does not make them unlawful.
As you say whether this is a good idea or not is one for the OP and their accountant.

 

[NortonBishop]

I think you need to start at the beginning. Calculate your profit for the year, deduct CT. The amount left is available for distribution as dividend. .......

That would only apply if there were no brought forward losses. And if there were brought forward profits then the amount would be higher.

(the OP has since said that this is their first year so the above point doesn't apply to the OP but it would to others)

 

[DWS]

OP already said it is their first year of trading
Just saw you edited your post above, but the OP did say this in their very first post.

 

[DontAsk]

As long as there are sufficient retained earnings in the Company when the interim dividends were distributed then it does not matter if at the end of year dividends distributed are more than profits it does not make them unlawful.

Ah, OK, thanks.

 

[last of the summer wine]

OP already said it is their first year of trading
Just saw you edited your post above, but the OP did say this in their very first post.

I did say that didn't I - that's how confused I am. The accountant has now come back again and seems to have contradicted what she told me about not exceeding the reserves, so I'm still no clearer one way or the other.

 

[DWS]

I did say that didn't I - that's how confused I am. The accountant has now come back again and seems to have contradicted what she told me about not exceeding the reserves, so I'm still no clearer one way or the other.

Did you read my post upthread about interim payments?

 

[Elliot Green]

I stand by my statement that it may not be a good idea part way through the year. What happens when you get to year end and there are actually insufficient retained profits for the dividends you have already paid.

Your proposition is not necessarily wrong per se because shortly after the year end you will hopefully have a set of *relevant accounts* to refer to.

This is quite a complex subject matter generally because there is more to a Director's risk in respect of a dividend than just the discrete legalities of an unlawful dividend.

It is also important to distinguish between the payment of the dividend and the declaration of the dividend. BM Electrical Solutions Ltd & Anor v Belcher [2020] EWHC 2749 (Ch) highlighted this general point:

For a dividend to become payable it must be declared. Once it is declared it becomes a debt due by the company to the member. However, unless formally declared there is no liability on the company to pay it (Bond v. Barrow Hermatite Steel Co. [1902] 1 Ch 353 at 362).

However, if indeed I understand you correctly, you appear to be assessing matters based on a year end date and there appears no reference in the legislation to restricting dividends based on a year end date. What appears key in legislation is that it does appear to restrict not the date it is declared but that you have a set of "relevant account" accounts to refer to and that you have distributable reserves.

The fact of your concerns appears that things change at a later date ie. like at the year end and things get worse so you could not have then declared a dividend in the same sum, does not appear to change the fact that if there was nothing earlier on in the year when the dividend was declared to fetter it i.e. no contingent and prospective liabilities, then if the reserves are there generally it may likely be ok.

The issue with a potential focus on the year end date is you might want to consider what happens if you declare a dividend at the year end and then make a massive loss shortly thereafter.

Disclaimer: This is not legal advice and not be relied upon. It is for information purposes only.

 

[DWS]

And the relevant legislation is

Companies Act 2006

An Act to reform company law and restate the greater part of the enactments relating to companies; to make other provision relating to companies and other forms of business organisation; to make provision about directors' disqualification, business names, auditors and actuaries; to amend Part 9...

www.legislation.gov.uk

 

[last of the summer wine]

What I couldn't seem to find a definitive answer to was, is it the total of dividends paid so far that musn't exceed the current distributable figure, or the dividend intended to be paid that musn't exceed it and I was concerned that as the total of dividends taken over the preceding months was on that day more than was showing as distributable, that we had gone over.

@ DWS What you have said here bears out how we understood it - that providing there were sufficient reserves, a dividend could be paid.

The accounting software we use opens up with a day by day updated mini P&L statement, showing income less expenses less CT provision less dividends already paid, and the balance from all that is shown as distributable reserves. This is what we have been going by and the dividend taken each month has been a fraction of what was shown as available.

I did run it past the accountant however, and her reply was:

" (name) should not draw further amounts if he has already drawn more than the distributable reserves. The amount drawn must be covered by dividends declared, which will usually be finalised at year end"

This tells me that it is the total drawn so far that musn't exceed the available reserves and that he can't draw any more dividends until we know what the final accounts are (and we understand that if he has gone over, the excess will go into his loan account and he will have to repay it within 9 months.)

Still confused!

Edited to add: my last email to the accountant last night was saying:
So, going by the figures I gave you in my first email this morning: "retained profit figure of distributable reserves at this moment is £19k. So far (name) has taken a total of £20k in dividends" he IS already over the limit as I first queried.

She has just replied with:
I agree that he is currently apparently overdrawn. IF this is still the case at accounts year end, there will be an HMRC tax charge. If he is not overdrawn at that time, there will be no tax charge.

That seems to be it then.

Again, thanks to all who have taken the time and trouble to respond.

 

[DWS]

Well what you are saying now is not what you said upthread, I asked if the £19k was retained earnings after CT and the £20k dividends already distributed and you said that was correct ( Monday 10.10 pm)
Now you are saying the £19k is before the dividends of £20k
So which is it? It can’t be both!

 

[Newchodge]

Could I suggest that part of the problem may lie with the way the OP phrases things. The copied email to the accountant did not seem to specify that the 19K at this moment was left AFTER tax and 20K dividends had been deducted. That seems to me to be fundamental.

 

[GLAbusiness]

OP says the dividends have been paid monthly. So, the question is:

At the time each dividend was paid was there enough retained profit to cover the dividend.?

If the answer is yes then all is OK. If no then at least one payment was unlawful

 

[japancool]

Thanks for replying so quickly. For example in round figures, dividends paid so far is £20k. The current retained profit figure is £19k (after deducting 19% for CT and the £20k dividends already paid so far

As @Newchodge says, this is confusing.

You deducted the 19% CT and you also deducted 20k for dividends paid so far. You have 19k left.

So your profit after you deducted ONLY the CT was 39k?

 

[WaveJumper]

I may be reading to much into this now but is the OP taking the dividends (as the director / share holder) or a third party in which case who is authorising this. And the million $ question why is the accountant not being approached first before sanctioning any dividend payments

 

[last of the summer wine]

Well what you are saying now is not what you said upthread, I asked if the £19k was retained earnings after CT and the £20k dividends already distributed and you said that was correct ( Monday 10.10 pm)
Now you are saying the £19k is before the dividends of £20k
So which is it? It can’t be both!

Sorry for the confusion. The £19k was after CT and dividends already distributed. It was shown in the P&L as distributable reserves.

 

[last of the summer wine]

OP says the dividends have been paid monthly. So, the question is:

At the time each dividend was paid was there enough retained profit to cover the dividend.?

If the answer is yes then all is OK. If no then at least one payment was unlawful

Yes, ample retained profit to cover each month’s relatively small dividend, every time.

Should we have been adding the running total of dividends paid so far in previous months to the current one being paid?

 

[last of the summer wine]

Could I suggest that part of the problem may lie with the way the OP phrases things. The copied email to the accountant did not seem to specify that the 19K at this moment was left AFTER tax and 20K dividends had been deducted. That seems to me to be fundamental.

Sorry if I didn’t make it clear. Yes, the 19k is what was left AFTER deducting tax and 20k of dividends already paid so far.

 

[DWS]

Sorry if I didn’t make it clear. Yes, the 19k is what was left AFTER deducting tax and 20k of dividends already paid so far.

So what is the problem? Yes there is £19K available to distribute and I posted the legislation to back this up

Should we have been adding the running total of dividends paid so far in previous months to the current one being paid?

BUT then you go and confuse matters yet again by saying do you add the running total of dividends previously paid to the current one, if you have already taken off the CT and the dividends paid and are still left with £19k then that is the figure left to distribute.
What does your Balance Sheet show? not sure what software you use but it should show at the bottom the Net Profit after C/Tax and then under that the total of dividends issued which in your case will be £20k, this according to what you are saying should leave you a total of £19k in available funds.
Just out of interest how much C/Tax has been allowed I make it that you should owe £9148.12, on your profits to allow £39k of retained earnings is this what your software shows?