Reply to: "Illegal" Dividends

[TheFaQQer]

And isn't that someone else's avatar? HINT

I miss him. He was a trucking legend.

[WordIsBond]

That would be the commons sense thing to do wouldn't it. I do hear if the odd person here and there that can and do empty their accountants somehow but a large percentage of them run in to accounting problems like this.

Absolutely. I don't have time to fine-tune dividend amounts / cash flows to the extent described in the OP.

[WordIsBond]

only a hypothetical question

The interesting type of hypothetical question that a lot of people might be thinking about in the first few days of April 2016, when everyone wants to get max dividends in before the start of the new tax year.

[pr1]

I will try......

Ok, the 1100 is reported by your accounting package. I will therefore assume that this represents the distributable funds that are sloshing around, be they generate this year, or over time.

You pay 1000 dividend on Jan 1. I will also assume you have the meeting to vote them, they are properly documented etc. Then so far so good. You now have £100 of distributable reserves.

On the 2nd Jan 500 quid is paid.

This is the oopsy moment. Was that liability in the accounts ? I assume not, if it was it should have been accounted for in the reserves figure.

If it was not in the accounts should it have been ? Possibly. But that depends what is was, was the liability known about ? Is it for consumption of something ? If so then it was a known liability.

The point really being that it is not simply the cash position. It is the overall accrual based accounting position that matters.

So, if the 500 was expected then the dividends was probably "illegal". I'd prefer the term ill judged.

If it wasn't then no real problem. Though probably still ill judged.

Unauthorised dividends are a mess and you have been given guidance. They do not magically turn into a directors loan (what I can say is that if they are even capable of being reclassified then there is probably a shortage of documentation or some false accounting going on).

What actually results in distributable profits is the subject of a few hundred pages of industry guidance; but I think you should be able to rely on the free agent figure.

Provided you have not breached you fiduciary duty by failing to enter accrued liabilities or readjusting.

Sure, it is entirely possible to get a 500 liability you were unaware of. But 10k, that's a stretch.

Re4ally your question could be phrased as "FreeAgent tells me I have got £1100 I can pay as a dividend, but I haven't told it about all the liabilities, can I still rely on this figure".

Thanks ASB - it was only a hypothetical question, there's no ulterior motive I just thought it was an interesting potential situation after reading up a bit on dividends. I think I agree with you that there shouldn't be any (big) "shock" liabilities in for a contractor

[Cirrus]

I'd have bailed out of this thread if were you by now

I doubt it. I think you sit there thinking "Why do I keep posting?" "Why do I waste my life on this pointless chat line? I should be doing work for my client"

Me - I'm weak and lacking moral fibre. But I don't pretend to be anything else.

I'll change my avatar. Shame - I quite liked that one.

[northernladuk]

I keep a few k of retained profit kicking around in the business account so that I don't need to worry about this sort of thing.

That would be the commons sense thing to do wouldn't it. I do hear if the odd person here and there that can and do empty their accountants somehow but a large percentage of them run in to accounting problems like this.

[PurpleGorilla]

I keep a few k of retained profit kicking around in the business account so that I don't need to worry about this sort of thing.

[ASB]

I will try......

Ok, the 1100 is reported by your accounting package. I will therefore assume that this represents the distributable funds that are sloshing around, be they generate this year, or over time.

You pay 1000 dividend on Jan 1. I will also assume you have the meeting to vote them, they are properly documented etc. Then so far so good. You now have £100 of distributable reserves.

On the 2nd Jan 500 quid is paid.

This is the oopsy moment. Was that liability in the accounts ? I assume not, if it was it should have been accounted for in the reserves figure.

If it was not in the accounts should it have been ? Possibly. But that depends what is was, was the liability known about ? Is it for consumption of something ? If so then it was a known liability.

The point really being that it is not simply the cash position. It is the overall accrual based accounting position that matters.

So, if the 500 was expected then the dividends was probably "illegal". I'd prefer the term ill judged.

If it wasn't then no real problem. Though probably still ill judged.

Unauthorised dividends are a mess and you have been given guidance. They do not magically turn into a directors loan (what I can say is that if they are even capable of being reclassified then there is probably a shortage of documentation or some false accounting going on).

What actually results in distributable profits is the subject of a few hundred pages of industry guidance; but I think you should be able to rely on the free agent figure.

Provided you have not breached you fiduciary duty by failing to enter accrued liabilities or readjusting.

Sure, it is entirely possible to get a 500 liability you were unaware of. But 10k, that's a stretch.

Re4ally your question could be phrased as "FreeAgent tells me I have got £1100 I can pay as a dividend, but I haven't told it about all the liabilities, can I still rely on this figure".

[northernladuk]

OK so you are above the threshold but in your first year.

I'd have bailed out of this thread if were you by now

How come you have a sockpuppet as your avatar?

And isn't that someone else's avatar? HINT

[Cirrus]

and/or!!

OK so you are above the threshold but in your first year.

[pr1]

I would be careful about contracting at low rates. It will probably be academic where you keep your war chest. If you're below the threshold you'll struggle to build one.

and/or!!

I think you've misread, misunderstood and misquoted pr1 there.

[northernladuk]

I would be careful about contracting at low rates. It will probably be academic where you keep your war chest. If you're below the threshold you'll struggle to build one.

I think you've misread, misunderstood and misquoted pr1 there.

[Cirrus]

.. you're (wrongly!) assuming MyCo ...makes more than the higher rate tax threshold

I would be careful about contracting at low rates. It will probably be academic where you keep your war chest. If you're below the threshold you'll struggle to build one.

[pr1]

Be clear what you mean by 'profits'.

In the simplest terms, I mean the number that freeagent tells me is "distributable" in the profit/loss box (assuming all my accounts are up to date)

You can pay a dividend greater than this year's profits as long as you have reserves in the company. I accept those reserves must also be profits but maybe people don't always think of prior years reserves as distributable profits. Contractors should normally have reserves because of the risk of being out of contract, so you should not normally be constrained by this year's profit when you are contemplating a dividend.

true, but you're (wrongly!) assuming MyCo:
Is not in it's first year
and/or
Makes more than the higher rate tax threshold and therefore it's tax efficient to keep profits in the company rather than pay them all out and keep the warchest in my personal account

[Cirrus]

hypothetical example:
MyCo has £1100 of distributable profits

Be clear what you mean by 'profits'. You can pay a dividend greater than this year's profits as long as you have reserves in the company. I accept those reserves must also be profits but maybe people don't always think of prior years reserves as distributable profits. Contractors should normally have reserves because of the risk of being out of contract, so you should not normally be constrained by this year's profit when you are contemplating a dividend.