Worse Case Scenario - Taken Too Many Dividends

[SimonMac]

I think I have done my sums right, but due to my contract being shelled early, what is the worse case scenario if I have taken to much out in dividends?

[Wodewick]

Worst case..........

Procecuted for trading while insolvent, or fraud? Banned from holding Company Directorship, Fined? Prison? Investigated by Hector to find any other "mistakes"?

But thats possibly OTT

[SimonMac]

Worst case..........

Procecuted for trading while insolvent, or fraud? Banned from holding Company Directorship, Fined? Prison? Investigated by Hector to find any other "mistakes"?

But thats possibly OTT

I'm not a director of my own LTD

Most likely scenario then, I assume a through grilling from Hector and obvisouly having to find the short fall with maybe a fine?

[Taxless]

If dividend payments are held to be illegal then the payments are effectively cancelled.

HMRC would likely say the sums paid were a loan to a participator (overdrawn director loan account) and the company would have to pay 25% tax on that sum, repayable when the sum is repaid to the company (9 months and 1 day after the end of the accounting period in which the repayment is made).

If you could convince HMRC you didn't know the dividend was illegal they may treat it as a distribution (akin to a dividend) but remember, ignorance of the law is not in itself a reasonable excuse.

If the 25% tax is paid late then you have interest etc.

On the company law side you have to repay illegal dividends in the 6 years following the payment, with the same escape as for tax if you were held to be innocent.

When is your accounts year end and do you still have time to rectify the position by the accounting year end with new contract income?

There may be an argument that the dividend was not illegal when declared, it is just that a change in circumstances left you in the lurch, but that depends on the exact circumstances.

[northernladuk]

I think I have done my sums right, but due to my contract being shelled early, what is the worse case scenario if I have taken to much out in dividends?

You could try and learn to pick up soap with your feet quickly

[SimonMac]

If dividend payments are held to be illegal then the payments are effectively cancelled.

HMRC would likely say the sums paid were a loan to a participator (overdrawn director loan account) and the company would have to pay 25% tax on that sum, repayable when the sum is repaid to the company (9 months and 1 day after the end of the accounting period in which the repayment is made).

If you could convince HMRC you didn't know the dividend was illegal they may treat it as a distribution (akin to a dividend) but remember, ignorance of the law is not in itself a reasonable excuse.

If the 25% tax is paid late then you have interest etc.

On the company law side you have to repay illegal dividends in the 6 years following the payment, with the same escape as for tax if you were held to be innocent.

When is your accounts year end and do you still have time to rectify the position by the accounting year end with new contract income?

There may be an argument that the dividend was not illegal when declared, it is just that a change in circumstances left you in the lurch, but that depends on the exact circumstances.

The year end is 4th October and yes I should be able to make good, just wanting to know what COULD happen if I balls it up

[SueEllen]

I'm not a director of my own LTD

You can be prosecuted for acting like a director even if you aren't one of the company's directors in certain cases.

[xoggoth]

Mistakes happen sometimes. Unlikely to be a problem if you have rectified it and have not underpaid any tax.

[Wanderer]

I'm not a director of my own LTD

So you are the major shareholder, someone else is the director and you voted a dividend at a board meeting which the director accepted? Then the director is going to get into trouble because they shouldn't have allowed the dividend to be voted if there was no profit to take. The company director needs to sort their act out and run their company properly.

HMRC would likely say the sums paid were a loan to a participator (overdrawn director loan account) and the company would have to pay 25% tax on that sum, repayable when the sum is repaid to the company (9 months and 1 day after the end of the accounting period in which the repayment is made).

When is your accounts year end and do you still have time to rectify the position by the accounting year end with new contract income?

Well put. Could the money taken just be accounted for as a loan to a participator (as SimonMac says he's not a director) rather than a dividend and then the loan be paid off when the next dividend is due. Not sure what the rules about loans to non-directors is, will there be a BIK involved here?

[Taxless]

I had assumed that the director in this case would have been MrsSimonMac, as I could not think that anyone other than a spouse would be trusting/daft enough to take on the duty of a company director without any control/dividend income stream.

A participator is someone with an interest/share in the company, normally a shareholder, possibly also a director. This includes their associates, spouse, civil partner, business partner, relative, trustee, or loan creditor.

With close companies there is a fairly unusual escape from the 25% charge for a loan of up to £15,000 made to a full time employee/director owning less than 5% of the company's ordinary share capital, assuming no spouse etc. connection with the shareholder.

The benefits charge will also be in play for the period that the loan is outstanding.