Dividends - Have you considered everything?
It is important to note that when examining dividend payments HMRC regularly asks to see copies of board and shareholder minutes and dividend waivers where appropriate.
As you know, a company may only make a dividend distribution out of ‘profits available for that purpose’ i.e. accumulated realised profits less accumulated realised losses (s.380 of the Companies Act 2006).
Don’t forget that…
To pay a dividend in excess of available profits is unlawful and could result in the shareholders being forced to pay back the amounts received and/or result in the directors becoming personally liable to contribute any amount that is unrecoverable from the shareholders.
The articles of association of a company usually provide for dividends to be declared by the company in general meeting by ordinary resolution and that the amount of such dividend should not exceed that recommended by the directors.
The wording used when deciding to make a dividend payment is extremely important. A dividend that is ‘declared’ immediately creates a debt and thus a binding obligation on the company to pay whereas the decision to ‘pay’ a dividend does not create a debt and can be rescinded by the directors.
The recording of a decision to either ‘pay’ or “declare” a dividend can have a direct effect on a shareholder’s decision to waive his right to a dividend. For a waiver to be effective for income tax purposes it must be executed as a deed and delivered to the company before the dividend becomes due i.e. before the dividend is either declared or payment received by the shareholder. A waiver executed after a dividend is declared or payment received will still be valid but the shareholder would still be liable to pay any tax due on the dividend.
Posted on 02/03/2015 by Ortolan