Managing dividend procedures correctly for company directors
Managing dividend procedures correctly for company directors is essential. We will cover how to manage the formalities, ensure compliance, and avoid pitfalls.
Overview
When it comes to dividends, directors must navigate a range of legal and financial obligations governed by The Companies Act. These are discussed below.
Your company's profits and legal requirements
Firstly, ensure that dividends are paid only from company profits available for distribution. This is not just good practice — it's the law under the Companies Act 2006. Therefore, you should always check that your company has sufficient accumulated profits. Equally importantly, it should have up-to-date accounts justifying the distribution.
Declaring Dividends
Your company's dividends can be interim or final unless restricted by the company's articles. Typically, dividends cannot be freely voted where a company has different classes of shares. Especially those that carry preferential rights to dividends.
Interim dividends are usually simpler, as these can be declare by directors without shareholder approval. However managing dividend procedures correctly for final dividends is more complex, This is because it requires a shareholder vote at the AGM and creates a debt that must be paid on a specified future date. This is more relevant for companies with outside investors.
Interim Accounts and Adjustments
If you're relying on interim company accounts, it's necessary to make adjustments. For example, accounting for work in progress, accruals, depreciation, and bad debts. What's more, these adjustments can significantly affect the company's distributable profits.
If you're relying on interim company accounts, it's necessary to make adjustments. For example, accounting for work in progress, accruals, depreciation, and bad debts. What's more, these adjustments can significantly affect the company's distributable profits.
If you are the company's only directors and shareholders it is often more convenient to scrap the formalities of a final dividend and only declare interim dividends.
The directors may declare interim dividends throughout the course of the year.
However an interim dividend doesn't create a debt. As a result id it's unpaid it can be subsequently rescinded by the shareholders.
Preference Shares and Automatic Dividends
For companies with preference shares, dividends on these shares are semi-automatic. As long as your company is profitable, these dividends are paid at a set rate, in line with the rights attached to the shares.
Documentation and Compliance
The Companies Act 2006 requires directors to record their decisions in board minutes. Furthermore, these must be kept for ten years. When declaring an interim dividend, you must minute the decision and prepare dividend certificates for each shareholder.
Additionally, these certificates should detail the payment date and the dividend amount.
For reasons of consistency, we recommend the dividend certificates are dated the same as the board minutes.
Timing and Tax Implications
Understanding when a dividend is treated as paid is crucial. For final dividends, the payment date is either immediate or at a specified future date, creating an enforceable debt. Interim dividends, on the other hand, can be varied or cancelled until the payment date and are only taxable when actually paid.
HMRC treat the payment as being at the time when a dividend is credited to a director's loan account. Alternatively this can be when the sum is available for the director to draw from their company.
Unlawful Dividends and Their Risks
Paying an unlawful dividend—without sufficient profits or outside shareholders' rights—can have severe tax consequences. It may trigger tax charges on overdrawn loan accounts, benefits in kind, or PAYE implications.
If your company has made losses this year, you may still declare a legal dividend. However this is only provided there are sufficient profits from previous years. Additionally you need to consider the net effect if your company current year profits are offset by previous losses.
Dividends in Specie
A dividend declared in cash though paid via asset transfer is called a dividend in specie. You'll need to ensure your company’s articles allow for this. Additionally you'll need to check that distributable reserves cover the asset's book value if no consideration is received.
Summary
By following these steps, directors can manage dividends efficiently, ensuring legal compliance and avoiding unnecessary tax complications. At the same time, having access to real-time financial information is key to managing dividend procedures correctly.
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