Over paid dividends

[skelm]

Scenario is this:
During the first financial year, dividends have been taken that exceed the Profit/Loss for that year ( e.g PL after Taxation is 1K but 2K was taken in divis so there is a loss of 1K for the company ). Now divis should only be paid after PL after taxation. So what are the implications of this? Will it raise eyebrows within HMRC?

Following this, in the second year less divis are taken ( so say the PL after taxation is 10K but only 5K is taken in divis ). Company reserves now has 5K so company is back in profit.

Is this "normal/allowed" business practice?

If it is not and HMRC will be suspicious, how can one fix part 1 ( i.e the loss due to divi overpayment? )

Thanks

[Jeebo72]

earn more money? You should only divi profits!

[Ardesco]

Scenario is this:
During the first financial year, dividends have been taken that exceed the Profit/Loss for that year ( e.g PL after Taxation is 1K but 2K was taken in divis so there is a loss of 1K for the company ). Now divis should only be paid after PL after taxation. So what are the implications of this? Will it raise eyebrows within HMRC?

Following this, in the second year less divis are taken ( so say the PL after taxation is 10K but only 5K is taken in divis ). Company reserves now has 5K so company is back in profit.

Is this "normal/allowed" business practice?

If it is not and HMRC will be suspicious, how can one fix part 1 ( i.e the loss due to divi overpayment? )

Thanks

Divi's can only be taken from profit. The money you took out that wasn't profit will ave to be classified as either wages, or a directors loan.

If wages you probably have tax/NI to pay on it. If directors loan make sure you can pay it back within 9 months or you will be liable for more tax. Talk to your accountant to get your company accounts sorted out.

[skelm]

Divi's can only be taken from profit. The money you took out that wasn't profit will ave to be classified as either wages, or a directors loan.

If wages you probably have tax/NI to pay on it. If directors loan make sure you can pay it back within 9 months or you will be liable for more tax. Talk to your accountant to get your company accounts sorted out.

1) If was to be classed as wages how does that work if SA has already been submitted with the "old wages" figure?

2) If classed as directors loan, again what happens if SA has been done?

Also if one is on the FRS, is VAT deemed an expense when doing CT calcs?

[Ardesco]

1) If was to be classed as wages how does that work if SA has already been submitted with the "old wages" figure?

2) If classed as directors loan, again what happens if SA has been done?

Also if one is on the FRS, is VAT deemed an expense when doing CT calcs?

You would have to amend your SA. You can either call up HMRC, or ask your accountant to deal with it. I would suggest using the accountant they have more experience dealing with HMRC and will know the right answers to give.

[skelm]

You would have to amend your SA. You can either call up HMRC, or ask your accountant to deal with it. I would suggest using the accountant they have more experience dealing with HMRC and will know the right answers to give.

I'd assume that in that case I'd be better of classing as directors loan ( at 25% ) rather than wages ( subject to 20% tax + 11% NI )

[Platypus]

I'd assume that in that case I'd be better of classing as directors loan ( at 25% ) rather than wages ( subject to 20% tax + 11% NI )

NI is ees and ers, i.e. approx 21% (or is it 22% these days?)

[Ardesco]

I'd assume that in that case I'd be better of classing as directors loan ( at 25% ) rather than wages ( subject to 20% tax + 11% NI )

It depends, too much directors loan used regularly could trigger an aspect investigation if they think you are using it to dodge tax.

[THEPUMA]

Scenario is this:
During the first financial year, dividends have been taken that exceed the Profit/Loss for that year ( e.g PL after Taxation is 1K but 2K was taken in divis so there is a loss of 1K for the company ). Now divis should only be paid after PL after taxation. So what are the implications of this? Will it raise eyebrows within HMRC?

Following this, in the second year less divis are taken ( so say the PL after taxation is 10K but only 5K is taken in divis ). Company reserves now has 5K so company is back in profit.

Is this "normal/allowed" business practice?

If it is not and HMRC will be suspicious, how can one fix part 1 ( i.e the loss due to divi overpayment? )

Thanks

You don't necessarily have a problem. It depends upon the timing of it all. So if in your example, you had made a post-tax profit of £2K and declared a £2K dividend, then in subsequent trading you sustained a £1K loss, the dividend would have been legal at the point it was declared so no problem.

[Maslins]

Agree with THEPUMA.

Your situation isn't that rare, and if you're confident of continuing to trade, and trade being more profitable in future, simply leave the old divi as is (even though it makes the company temporarily insolvent), and carry on...but do be more prudent when declaring dividends in future.

The main time you may come a cropper is if you tried to shut the company down whilst insolvent due to dividends in excess of retained profits. Here you may find creditors being not best pleased as it would be them that lost out. They may try to challenge the dividend, suggesting negligence on your part.

More of a legal issue than an accounting one, happy to be corrected by any legal experts.