Illegal dividend payments & Co profits

[mobwell]

Just wanted to clarify something about dividend payments. I know a dividend payment will be classed as illegal if the company hasn't actually made enough profit to cover it, but does this profit reset to zero at the beginning of each company year or does the profit carry over from the previous year.
If it is the first, can I pay myself more dividend than the company has made in profits at the beginning of the year so long as the profits cover the dividends by the end of the company year?

[smee.again]

How can you pay yourself more than you have? Or have I misread this?

[Euro-commuter]

How can you pay yourself more than you have? Or have I misread this?

D'uh! You could pay yourself money that is in the company bank account but is not profit. That would be wrong, because dividends can only be paid out of profit.

[smee.again]

D'uh! You could pay yourself money that is in the company bank account but is not profit. That would be wrong, because dividends can only be paid out of profit.

Ok OK...D'uh!!

[chicane]

If you don't keep track of things, it's not difficult to pay excess dividends only to find out that you don't have enough profit to cover them at a later stage.

For example, you might have 10k in your bank account, 2k of which is allocated for a future VAT return and 5k of which is allocated for corporation tax applicable on dividends previously paid. Even though you don't "own" 10k in accounting terms, this money still resides in your company bank account, therefore it's possible to pay out a dividend of 10k at this time.

To answer the OP's question, I believe there's nothing wrong from a legal standpoint with paying out dividends based on speculative profit, although you'd better be sure that there's sufficient profit at year end to cover the dividends paid. And yes, the dividend count is "reset" at year end.

Usual disclaimer applies.

[smee.again]

That clears it for me...kind of...

[Jog On]

This has had me a bit worried as well. I spent the first 3 months (my first contract) just getting my head round everything and all set up. I paid everything as divis and to start with got paid directly into my personal account while I waited for my business account to get opened which took about 6 weeks!

I’m hoping there is some understanding/leeway for new companies starting out and finding their feet – now everything is all set up and automated, I keep corp tax and other tax in the company, pay monthly salary/expenses and then divis out of remaining profit.

My accountant advised me that while I was waiting for my business account it would be OK to get paid into my personal account and we’d sort it out later. I’ve paid a quarterly income tax/NI payment so I’ll just do it all properly from now on. I think the important thing is that I’m making money and paying tax – think I’ll start working on sorting out the starting up mess sooner rather than later though. I’ll phone up Hector if need be and be completely open and ‘compliant’ about it to work out a solution.

[ASB]

Profit is retained from previous years. So year 1 profit = 100k, year 2 loss = 50k you still have 50k of divis you can pay.

[Jason D]

[QUOTE=chicane] And yes, the dividend count is "reset" at year end./QUOTE]

No it isn't. Retained profit is distributable.

[Old Greg]

Profit is retained from previous years. So year 1 profit = 100k, year 2 loss = 50k you still have 50k of divis you can pay.

Thanks, ASB - that answers a question I've not got round to asking. This means that at the beginning of 2008/9 (which coincides with the beginning of my Ltd.'s 2nd year, I can pay myself a big wad of divis up to the higher rate limit (minus planned salary for the year) - as long as VAT and CT obligations are still in my account. Or have I got that wrong?