Dividend while debts exist

[xoggoth]

As I understand it, dividend can be paid provided there is sufficient profit in the most recent distributed accounts, even though money is still owed to directors for expenses. Just looking for confirmation. Ta.

PS In case anyone is wondering why a dividend instead of repaying expenses, it's because director A is owed much more than Director B, but director B (me) is pissed off with getting absolutely nowt in return for spending umpteen hours on websites and accounts.

[Kenny@MyAccountantFriend]

Provided the company has the reserves available a dividend can be paid by the company.

Debts are treated separately.

[xoggoth]

A nice prompt answer! Ta very much.

[WordIsBond]

Provided the company has the reserves available a dividend can be paid by the company.

Debts are treated separately.

Perhaps clarification is in order.

Suppose I:
1. Pay a dividend disbursing all funds in the company on 31 March 2016
2. Make a director's loan to the company consisting of anticipated profit for the first nine months of the new tax year on 1 April (note, April Fools Day).
3. Pay a dividend in the same amount on 2 April.
4. Distribute no dividends, but instead repay the director's loan, over the next nine months.

If I then claimed that the loan had created a reserve which could be disbursed as dividend, because "debts are treated separately," would HMRC simply say, "Sure, you win"?

[Kenny@MyAccountantFriend]

No the loans to the company would not generate a profit as they are not income for the company.

Reserves are the profit in the company and only these can be paid out as dividends when available. Not based on anticipated profit in the future as this would in effect be a loan to you.

[Contreras]

However it is a gross simplification to say that debts are treated separately and the advice given could easily be misinterpreted.

The debts must be considered in the retained profit calculation, as such they are not separate.

If we assume for the OP that the expenses were incurred and submitted prior to the accounts being made up, then yes the retained profit can be paid as dividend. Otherwise further clarification is required.

[xoggoth]

The debts must be considered in the retained profit calculation, as such they are not separate

Indeed, I don't think one can make a divi based on a one-off annual profit. The equity shareholders funds carried forward in the balance sheet shows a net positive after taking account of all debts etc.

PS And as a result I will have to pay corporation tax! Seems reasonable I should get my cut for a lot of work if HMRC get theirs for f* all.

[WordIsBond]

No the loans to the company would not generate a profit as they are not income for the company.

Reserves are the profit in the company and only these can be paid out as dividends when available. Not based on anticipated profit in the future as this would in effect be a loan to you.

Precisely why I said clarification is in order. Thank you.

As others have noted, to say debts (to directors) are treated separately could certainly lead to some confusion, which is why I constructed the scenario I did to illustrate how easily someone could misunderstand the original statement.