When and how?
If you have your own limited company, you will know that as a shareholder, a tax efficient way of extracting profits from your company is to take them as dividend payments.
But how and when can you take these dividend payments?
In short, so that you don’t jeopardise the financial stability of your business and in order for the dividend to be valid, you will need to make sure that you’ve gone through the correct procedures and process before making the dividend payment.
Therefore, the following steps need to be considered:
Check your distributable profits
You need to check that the company has distributable profits, which is then available to be taken out as a dividend. If you don’t have sufficient distributable profits to support the payment, it won’t be legal. The Companies Act 2006 requires dividends to be paid out of “profits available for the purpose”. These are the company’s accumulated realised profits less its accumulated realised losses.
You must ensure that you’ve considered the following before making your calculation:
For an interim dividend you must prepare up to date management accounts prepared on the normal accounting policies and unless it is the first year of trading, you should refer to the company previous accounts, whether these are your company’s last annual accounts, or a subsequent set of interim accounts, to check what distributable profits have been accumulated to date.
For a final dividend you will be referring to the company’s completed accounts, whether these are your company’s last annual accounts, or a subsequent set of interim accounts, to check what distributable profits have been accumulated to date.
You should ensure that you have calculated and deducted corporation tax from the company profits, and that the company has sufficient funds to settle the tax bill.
Also, make sure that you have worked out what ongoing working capital obligations the company has, both the known debts and liabilities and a projection for the next few months or even the next year.
Does the company have enough cash available to make a dividend payment and when exactly should it be paid? You must ensure that the company has cash available to meet its ongoing debts and liabilities.
Bounce back loans
Loans and other financial support the company has received should not be included in the profit calculation, but CJRS (furlough) receipts and rates grant are.
Using an incorrect figure from the company’s accounting records or not taking into account other current and ongoing liabilities can cause problems when calculating whether a dividend can be paid.
Declare the Dividend and Vote
For an interim dividend, you will need to have a meeting of the board of directors (it may only be you, but it is still a requirement) before the payment can be considered lawful. This should be held to consider the level of distributable profits available, and to ‘declare’ the dividend. An interim dividend declared by the directors is then ratified at an AGM.
For a final dividend, you will still need to have a meeting of the board of before the payment can be considered lawful. This should be held to consider the level of distributable profits available, and to ‘declare’ the dividend. A vote should be taken by the shareholders and recorded to agree the dividend payment.
Take minutes and record the liability
You’ll need to take minutes of the meeting (this still applies if you are the sole director and shareholder) and make a record of the board’s decision (if an interim or a final dividend) and, also the shareholder vote (if a final dividend). The minutes can then be provided to HMRC if there is any question in the future about the legality of the payment of dividends. You also need to record the dividend as a liability in the company accounting records.
Issue a Dividend Voucher and then Pay it!
A dividend voucher with your company’s name, date, total amount payable, and details of the shareholders who will receive it, should also be issued to recipients either as an electronic soft copy or hard copy. Recipients will need the dividend vouchers to support their own tax returns.
Once all these points of process have been followed, the dividend can then be paid!
Don’t forget that you can’t retrospectively go through these processes to justify that a payment from the company is a dividend. If the processes have not been followed before the payment is issued then there could be consequences in relation to company law and taxation.
It’s always best to seek the advice of a professional to ensure that you are following the correct accounting procedures in relation to paying dividends.