Dividends and CT loss

[Contreras]

Hello

Q. Is it allowed to declare and pay a dividend if the company has made a loss in that same year?

To be clear, that's a loss, and NOT that the company is, was ever, or expects to be, unable to cover its debts. I've asked my accountant for clarification and am currently awaiting their response.

Say, company starts the year with stated "Shareholder funds" of £Nk from previous year.

At year start, company pays a dividend of well less than £Nk, credited to DLA.

At year end, salary and pension are paid as annual lump sums.

Turnover for the year is about half of what it was the previous year. Overall the company makes a loss, essentially total expenses exceeding total revenue... the main expenses being salary + pension of course... it not being a total wipe out though, the company is still solvent.

The CT loss will be cast back to the previous year and should give rise to a CT refund in due course.

It has been suggested that the dividend is disallowed due to the booked loss. With the dividend cancelled, the loss remains the same but the stated shareholder funds would now stand at 2x the dividend amount, i.e. it's still more than twice covered. It is this point which I am seeking clarification on!

Can HMRC refuse the CT refund? Presumably, yes, but on what grounds and might this have relevance for the ability to pay a dividend?

[pr1]

If you have sufficient retained profits from earlier years you can pay a dividend in a loss-making year

[Lance]

If you have sufficient retained profits from earlier years you can pay a dividend in a loss-making year

Correct. As long as the company isn't pushed into insolvency. Another advantage of FreeAgent as it tells you how much you can withdraw (although be aware that it doesn't have future commitments like salaries or accountancy fees in that calculation so the dividend itself might not push the company into insolvency, but additional expenses like those may well do after a few more months).

[Maslins]

If you have sufficient retained profits from earlier years you can pay a dividend in a loss-making year

Yup, OP think you're worrying unnecessarily about this. Current year position in isolation is irrelevant, it's the carried forward position at the time of wanting to declare the dividend.

[Contreras]

Thanks everyone. Actually that's as I thought. My accountancy firm originally said the divvy was disallowed on the basis of the loss, but we're in agreement now.

I have a follow-on question - should the CT refund be shown as a Debtor and therefore contribute to the shareholder funds stated in the company accounts, or can/should this be omitted?

And just as a point of interest, would anyone care to enlighten me on the difference, if there is one, between "Shareholder funds", "Distributable profits" and "Reserves"?

Cheers.

[Maslins]

I have a follow-on question - should the CT refund be shown as a Debtor and therefore contribute to the shareholder funds stated in the company accounts, or can/should this be omitted?

If you expect to receive it (ie you can carry back against suitable taxable profits), it should be a debtor...so yes, you can be in a situation where you make a £10k loss, but retained profit only goes down £8.1k as you'll expect to recoup £1.9k of it.

And just as a point of interest, would anyone care to enlighten me on the difference, if there is one, between "Shareholder funds", "Distributable profits" and "Reserves"?

I'd suggest for your typical contractor company they're all essentially the same thing. Pedantically shareholders funds would likely include the share capital, whereas the others are just the retained profit. Also in some more complicated situations (not ones your typical contractor company might get into) you may have other things like a revaluation reserve, share premium etc.