Dividends are a very tax efficient way to be paid, if used in the right way.
In order to declare dividends, a company must meet the requirements of the Companies Act 2006 (section 830-853 if you really want to read up!).
A company must have:
- Accounts to demonstrate profits (either annual or recent ‘management’/’interim’ accounts)
- Sufficient built up ‘profits’ to cover dividends
- Records of the decision to pay a dividend (kept for 10 years.!)
If you are not meeting the above requirements, you may be paying unlawful dividends.
These will be treated (in general) as a loan for tax purposes, which could cause unwanted tax issues.
A step by step checklist:
Review the accounts – confirm that your company has enough profit.
Companies need to have enough ‘retained profit’ to cover the amount of dividend being paid. If you are using ‘management’ or ‘interim’ accounts, they need to be adjusted to account for any tax that may be due in the future (for example ‘current year’ corporation tax), depreciation, stock, etc (for a full list, contact us).
The main document you need to review is the Balance Sheet/Statement of Financial Position (this can be complex to understand).
If you have an accountant it is a good topic to cover, as getting a good understanding of how to read a balance sheet makes for better long-term decisions (and help bridge the gap between your understanding, and their advice).
If you are using annual accounts, do check that the current trading profit/loss is considered.
For example, if you are looking to declare a dividend in March 2019, using November 2018’s accounts – how much has changed profit wise?
Decide on the type of dividend – Interim or Final.
For small businesses, it is usual to declare interim dividends, often frequently during the year.
Final dividends must be declared by shareholders at an annual general meeting (AGM). Often small businesses do not carry out the big, formal AGM, as you don’t need to (unless ‘Articles’ require the company to, which is unusual, if you’re not sure if you should be, just check with us).
If you wish to declare a final dividend there are a few more formalities, but to keep this simple (and relatively short) we won’t cover these here and presume you are declaring Interim Dividends.
Declare the dividend & sort the paperwork
You need to prepare ‘Meeting minutes’ of the decision to pay the dividend.
You will need to do this even if you are a sole director/shareholder.
For best practice, prepare a shareholder ‘voucher’ that shows:
- The date of the dividend
- Name / address of shareholder
- Number of shares held
- Payment per share
- Type of dividend
(Previously you would have a ‘tax credit’ shown on this as well, but that no longer exists)
You then retain the voucher in your files, or pass on to the person receiving the dividend, as they will need it to prepare their tax return.
‘Pay’ the dividend
Interim dividends are counted as paid when entered into the accounting ‘books’. This is available to the director in their Directors Loan Account, or actually paid out.
This is a very important point, on which we cover more in our blog on Dividend Timing as getting this wrong can miss out tax saving opportunities, or at worst case cost you money.
As you can see, the process has a few potential pitfalls.
The key priorities are to have fully adjusted accounts and to read what profits are available as a potential dividend.
Check that you are:
- Sure you have sufficient profits
- Sure you are operating most tax efficiently, with the timing and amount of dividend
- Considering the amount in your Director’s Loan Account
All these areas are where a good accountant, reviewing your accounts regularly, will be able to assist and ensure everything is above board and more importantly – super tax efficient. We’ve mentioned this before, but if you see your accountant only once a year it is likely you are missing out here.
If you are managing these yourself, we always take pains to understand where you are at. This is so that you don’t expose yourself to potential tax issues. There is a lot of company and tax law around dividends that make this a complex topic. What we see most often is people saying something is a dividend, without the correct paperwork or knowledge to legally make it one.
If there is anything in this article you would like to discuss further, please get in contact with us on 02392 240040 or firstname.lastname@example.org