"Illegal" Dividends

[pr1]

hypothetical example:
MyCo has £1100 of distributable profits
on 1st Jan I pay a £1000 dividend
on 2nd Jan MyCo pays a £500 bill via a direct debit

If I (as the sole director) knew the bill was due, did I pay an illegal dividend on the 1st Jan?
- What about if I didn't know? (eg if the usual amount for the direct debit was £100 but it had spiked for one month)

Would £400 of the dividend retrospectively become £400 of directors loan (through end of year accounting)?

Assuming MyCo had balanced everything by year end, does it matter? if not, what if the numbers were a lot bigger i.e. over 10k?

thanks

[MrMarkyMark]

Lets cut to the chase, are you asking to borrow £500?




I believe it would be an "illegal" dividend, what that actually means in practice, I'm unsure.
Interesting question.

[northernladuk]

Are we assuming this is a one off situation and not a plan to continually declare dividends knowing stuff has to be paid putting the company in to loss?

Am sure an accountant will come on and explain it in one sentence but there is some interesting reading here..

Illegal dividends | ACCA Global
that states...

Effect on the accounts of illegal dividends

In the accounts of private companies the directors may include an explanation within the dividend note that either:
1.The dividend was not illegal as it was based on interim accounts which showed there were sufficient profits available for distribution at the time the dividend was paid, or
2.An explanation of the illegal dividend payment and reasons why the event occurred. For example 'The directors acknowledge illegal dividends were declared and paid. No further distributions have been made and the directors are seeking to recover monies from the shareholders'. Another example is 'At the time the dividend was paid the directors were not aware that there were insufficient profits available for distribution and the directors acknowledge that no further distributions can be made until there are sufficient profits available for that purpose'.

Number one would lead you to believe you didn't do anything wrong, not the smartest move when you know you are going to make a loss but not wrong.

Another interesting read is

http://www.grant-thornton.co.uk/Page..._dividends.pdf

Which does point out

Directors must also keep in mind their fiduciary and other
duties, for example their obligation to safeguard the company's
assets and take reasonable steps to ensure that the company is
in a position to settle its debts as they fall due. Hence, directors
will need to assess whether the company will still be solvent
following a proposed distribution.

And lastly an article that mentions the Directors Loans option you mentioned...

Illegal dividends - what they are, and how to avoid them

which says (and has links in in the article)

HMRC has provided some technical guidance supporting the repaying of an illegal dividend.

Technical guidance to correct an illegal dividend declaration

HMRC manual CTM20090 states:

‘Frequently the dividend is found to have been paid unlawfully. If that is the case, the company’s advisors will be able to rectify the situation by reducing or extinguishing the amount of the dividends and drawing up approved accounts showing only such amount of dividends as can be supported by distributable profits. Corresponding adjustments will be made to directors’ loan accounts, if the dividends have been credited to such accounts in the company’s books, or in draft accounts.’

(Read the full guidance here, and further guidance in Manual CTM15205).

As I say am sure an accountant will give you an answer to fix your situation but those articles are worth a read.

[MrMarkyMark]

Good stuff NLUK, interesting reading

[VectraMan]

Yes good info.

I think as long as you're square by year end it's never going to matter and nobody is ever going to find out. But if you've overpaid dividends in the year that makes your shareholders funds section of the balance sheet negative, and that's a pretty obvious red flag.

[ContrataxLtd]

That's a very good post by NLUK, what's happened to the whole 'ask you accountant line'?!? I'm a little stunned to say the least.

In my opinion, I would say that you haven't declared an illegal dividend as you had sufficient reserves to pay the dividend at the point it was paid.

However, as director you have a duty to take into account future expenditure and take this into account when declaring dividends. This would only become an issue if you continued to pay dividends and at some point they were actually illegal i.e. making reserves negative. Even then, it would probably only become an issue if you couldn't pay your taxes when they fell due and HMRC pushed for liquidation at which point the liquidator would start asking questions and probably try and recover monies from the shareholders personally.

Hope this helps.

Martin
Contratax Ltd

[northernladuk]

That's a very good post by NLUK, what's happened to the whole 'ask you accountant line'?!? I'm a little stunned to say the least.

OP has been around long enough to know that, and to search (which is how I found the info) but slow day at client Co so I thought I have a rummage around.

[Danglekt]

OP has been around long enough to know that, and to search (which is how I found the info) but slow day at client Co so I thought I have a rummage around.

I can confirm there is a very entertaining dog fail video doing the rounds - a good way to kill 5 minutes while trying not to laugh

[pr1]

Thanks all

[northernladuk]

I can confirm there is a very entertaining dog fail video doing the rounds - a good way to kill 5 minutes while trying not to laugh

They always make me laugh and am not saying it's grim at client co but someone laughing is immediately going to raise suspicions. I'll stick to reading the daily fail which makes me glum so I fit in with the locals.... but not enough to be an IR35 issue