Divendend frequency

**vetran** · 20 March 2006, 22:46

Directors loan account

Your company can loan you up to £5k for for a maximum 9 months so long as you follow the rules. This is called the directors loan account, once you issue dividends / pay expenses you repay the account first.

This isn't really normal practice, but I believe in a start up its possible, its real job is to smooth transactions between the directors and the company and limit the amount directors borrow from their companies. To avoid NL donors borrowing £1 million from their company interest free and repaying it just before death etc.

Frequency of dividends can vary, so long as you can prove they are profits distributed and not a substitute for salary then they are fine.

IANAA

**knec** · 21 March 2006, 10:22

I was just wondering what the problem is with issuing dividends monthly? You will still be paying your 20% tax on your profits before your dividends are paid so the tax man should be happy shouldn't he?

**Dundeegeorge** · 21 March 2006, 10:33

There isn't a problem with monthly dividends

Originally posted by knec

I was just wondering what the problem is with issuing dividends monthly? You will still be paying your 20% tax on your profits before your dividends are paid so the tax man should be happy shouldn't he?

provided that you always do the paperwork.
You will no doubt have people bleating that the IR see it as salary.
Yes they will, but the IR think they're entitled to all of your income anyway, so that's not a rational argument for or against.

**boredsenseless** · 21 March 2006, 10:41

Originally posted by knec

I was just wondering what the problem is with issuing dividends monthly? You will still be paying your 20% tax on your profits before your dividends are paid so the tax man should be happy shouldn't he?

The issue is pretty simple:

Dividends can only be paid out of profit. Therefore you have to satisfy the following.

a) Retain (or have paid) enough corporation tax to entitle you to call the amount paid as a dividend 'profit'

b) Ensure that your company has enough money to satisfy all its liabilities without incurring a loss. Consider the following

You earn 1,000 month for 6 months.

Therefore each month you retain £190 Corp Tax and pay the remainder out in dividends. (Now I know this is simplified but its just to show a point not to show of my accounting qualifications)

Now in month seven with the company account severly depleted (i.e. zero except for the retained Tax) you need to pay £700 for a laptop and £200 for a train ticket, and don't get another contract this financial year.

Oh dear you've made a loss of £900 which means your dividend payments are illegal.

This will get you a rather hard smack, fine and all sorts of other nastiness. Bear in mind you are a director of the company and you have a responsibility to ensure the company pays it full tax, and acts within the framework of the law. You can get prosecuted (or at least barred as a director for the above)

However if you are sensible (and pay yourself at least minimum wage which is per hour so you need to prove the hours you worked!) you will be fine with dividends, always leave a rather large working buffer, that you can pay out as a final dividend if required.

**partimer** · 21 March 2006, 11:49

proper business

Agree with Boredsenseless.
It's what separates "Real Businesses" from "Disguised Employees" in the eyes of the IR. Work within the framework, you'll get less problems that way. There is nothing to stop you declaring dividends every week (even if you are inside IR35) but name one company with more than two employees that does that.

Always try to act like a "proper business". It's the only way to keep the IR from coming at you.

**ASB** · 21 March 2006, 12:24

Originally posted by boredsenseless

The issue is pretty simple:

Now in month seven with the company account severly depleted (i.e. zero except for the retained Tax) you need to pay £700 for a laptop and £200 for a train ticket, and don't get another contract this financial year.

Oh dear you've made a loss of £900 which means your dividend payments are illegal.

Poor example because the laptop is a capital purchase. In the example you give the profit is 5,800. Dividends 4,860. However you'd probably still be in trouble because depreciation of the laptop or the continuing CT liability as a result of the dividend payment would still lead to net negative shareholders funds.

**XLMonkey** · 21 March 2006, 12:54

It doesn't much matter....

it doesn't matter much, because you do not have to draw the money at exactly the same time that you declare the dividend. So you can, if you wish, declare a dividend of 12,000 but withdraw it from the company account in 12 chunks of 1,000.

There are two issues to consider:
1. Your duty as a director is to declare dividends on the basis of the company's performance, not on the basis of how much money you need. The other poster's have already covered this. I would only add that you can declare a dividend based on future earnings, provided that you can reasonably expect them to come about. E.g. you have been trading for 3 months at 7,500 per month, have costs of 200 per month, and have a contract for a further 6 months: it's perfectly reasonable to declare a dividend of more than 3 months profit (21,900), since you can reasonably expect the remaining 6 months revenue to cover it. FTSE companies do this all the time, and call it an Interim Dividend.
2. The most common way that the IR pick up on "salary as dividend" issues is through your tax return, since you need to provide copies of each dividend voucher. Therefore, if you declare lots of dividends, then you have to submit lots of dividend vouchers, which looks suspicious. If you declare a single big dividend, but only withdraw it in instalments, then all you provide on your tax return is one dividend voucher. You are under no obligation to report to the taxman how many instalments you received the dividend in.

**ASB** · 21 March 2006, 13:12

1. Your duty as a director is to declare dividends on the basis of the company's performance, not on the basis of how much money you need. The other poster's have already covered this. I would only add that you can declare a dividend based on future earnings, provided that you can reasonably expect them to come about. E.g. you have been trading for 3 months at 7,500 per month, have costs of 200 per month, and have a contract for a further 6 months: it's perfectly reasonable to declare a dividend of more than 3 months profit (21,900), since you can reasonably expect the remaining 6 months revenue to cover it. FTSE companies do this all the time, and call it an Interim Dividend.

True, but it's not without risk. In general of course with large concerns it will be covered by previous retained profit. One company I was invested in some years ago paid an interim. Shortly after this trade took an unexpeted turn for the worse. The result of this was net negative shareholders funds.

The IR disallowed the dividend which caused them all sorts of issues since they had paid it out.

**IR35 Avoider** · 21 March 2006, 21:55

My accountant has always told me that in order to avoid dividends being reclassified as salary (attracting NI) I must be able to prove that they were paid out of profits, and prove that I knew at the time I declared the dividend that the profits were there.

When I used to declare regular quarterly dividends, along with my minute of the directors meeting declaring the dividend I kept a copy of the accounts made up to the date of the declaration. (This was a copy made from my version of the accounts in Quicken, which 99% matched the official version kept by my accountant.) I don't keep copies of the accounts any more because the company has enough retained profits that there's no doubt the dividends are valid.

Divendend frequency