Reply to: Dividend Overpayment

[Wanderer]

An illegal dividend can be declared when there are insufficient profits to cover the dividend at the time of payment,”

Yep, that's correct. If there is no profit then there can be no dividend so it's just accounted for as a director's loan and repaid when the company has some profits again.

[northernladuk]

Problem is it changes everywhere you read and although the web and google is great for finding info it is also a nightmare for knowing which is right. To counter the find above I found this... I am not saying this one is right. I see that end of year seems fine now but just for example....

An illegal dividend can be declared when there are insufficient profits to cover the dividend at the time of payment,” explains James Abbott of specialist contractor accountant Baker Watkin. “A dividend can also be illegal if a contractor fails to complete board meeting minutes of the dividend decision and a dividend voucher for shareholders, according to the requirements of the Companies Act.”

Found on

[jungleboogy]

I saw this article on contractorcalculator:-

"You can distribute dividends at any time. You just have to have money in the bank account to do so. But, beware, at the end of your tax year you must ensure that the total of all your dividends taken have been covered by profits earned by the company after all expenditure (including salaries) and corporation tax. If you pay dividends out of untaxed earnings, the Revenue will express its displeasure with your actions".

It's certainly not something I'm planning to repeat in the future, the fact my end of year accounts have not been submitted yet and I don't plan to draw a dividend for the next 2 months will redress the balance. In future I'll make sure I only draw dividends from the profits calculated each month.

Thanks for your advice guys

[THEPUMA]

I really think you should be concerned about the illegal dividend point. If HMRC come along and investigate (which admittedly is not that likely but a risk nonetheless) they will say that this is a salary payment and want you to pay Er and Ee NIC. The same can happen if you don't have dividend vouchers and board minutes to document the payment of a dividend.

So for now call it a directors loan until you do have the reserves to pay a legitimate dividend. Always make sure you are assuming 20% (ideally 25% corporation tax) when working this out.

As long as you don't have an outstanding loan at year end there won't be any tax cost.

Hope that helps.

@TimCaprica
Caprica Online

Why will they say that? WHy won't they say that it is an overdrawn director's loan account?

[TimCaprica]

I really think you should be concerned about the illegal dividend point. If HMRC come along and investigate (which admittedly is not that likely but a risk nonetheless) they will say that this is a salary payment and want you to pay Er and Ee NIC. The same can happen if you don't have dividend vouchers and board minutes to document the payment of a dividend.

So for now call it a directors loan until you do have the reserves to pay a legitimate dividend. Always make sure you are assuming 20% (ideally 25% corporation tax) when working this out.

As long as you don't have an outstanding loan at year end there won't be any tax cost.

Hope that helps.

@TimCaprica
Caprica Online

[Scrag Meister]

Personally I wouldn't. Over paying dividends from money that is not yours I believe is illegal. You don't just fix something you have done illegally by sorting it out over a few months to suit you. It is not your money, sort it first before paying yourself a divi.

You don't mention if you have a warchest though. Is teh comapny in profit overall or do you live hand to mouth?

If you have paid yourself money that belongs to HMRC pay it back quick.

Personally I agree with your sentiment, but from experience I have found that HMRC aren't too picky if everything is square at the year end.

[northernladuk]

Found a very interesting thread on Accounting web which appears to cover this plus other general tardy contractors approach to divis and even the accountants don't agree...

Dividend Paperwork | AccountingWEB

Quite funny to see the accountants side and them trying to screw us over

Now, in my experience small (sole director, family run) companies are a headache. They never seem to have the time to do all their own work let alone worry about the legalities of taking money out of their company - surely it's theirs anyway?

It was for this reason that we changed our practice. All our companies now utilise us to produce at least quarterly management accounts, sit in on their "board meetings" and approve dividends as necessary.

This has significantly improved our fee income, the client feels that we are taking an active part within their business and has produced additional business advisory services too.

If you take the initiative to turn what appears a negative to something much more positive your client will thank you and reward your pocket.

Perhaps we could all learn to be a bit more proactive?

[Wanderer]

Of course. I think both sides is completely valid.

I agree. Northernladuk is leaning towards the more conservative approach and he has a point. It's better not to borrow company money unless you are absolutely sure you know what you are doing.

However, if you are running a close company then there are no shareholders to complain so it's not such a big problem unless the director spends all the company's money and can't pay it back.

I'd say don't worry about it and just balance it up at the end of the year but make damned sure you pay the loan back (by declaring a dividend from profits) before the end of the company year.

[MarillionFan]

I will happily take that criticism and agree. There needs to be a balance of what is right and wrong for people to then learn what they can get away with. I don't agree telling someone that doesn't understand their finances well enough to mess up it is ok to wait it will sort itself out. There could be temptation to continue in that laissez faire attitude until the tulip really hits the fan.

I would rather (try) give the black and white of the situation so the OP's understand exactly what they are doing wrong first. Then yes, agreed, when the OP can understand and manage his finances he can sort it out over the year.

Besides, to be fair, I learn more looking it up and regurgitating what I have found.

Of course. I think both sides is completely valid.

The truth is the OP should be looking as if he's running a business. He needs to understand cash flow, his yearly forecast, expenses, accountancy and VAT. All contractors should have a forecast spreadsheet in my opinion, excluding VAT (that's always Hectors) , 20% allocated for Corp tax, basic salary amount offset and the rest is what they can take as divvies. It's extremely easy and simplistic to do, without of course someone like the OP could find themselves with a new roommate called Bubba. ;-)

[xoggoth]

Agree with MF. Even if you do a full profit & loss before the divi, there's nothing to stop profits diving thereafter, if you can't do the contract due to illness perhaps. It's the year end that really matters.

[northernladuk]

As usual NLs advice is simplistic and staid.

For example i pay my accountancy fees yearly, shortly after the financial year. Or office rental every quarter??? My telephone bill is quarterly. Hey what about a yearly rail card???

You don't really know your profit until the end of the year so to say it is 'illegal' to take out to much in a given month is riculous. The same goes with corporation tax. It's over the year, if you took too much out it's down as a loan and your accountant can work out any fees/interest. Just don't take the piss.

I will happily take that criticism and agree. There needs to be a balance of what is right and wrong for people to then learn what they can get away with. I don't agree telling someone that doesn't understand their finances well enough to mess up it is ok to wait it will sort itself out. There could be temptation to continue in that laissez faire attitude until the tulip really hits the fan.

I would rather (try) give the black and white of the situation so the OP's understand exactly what they are doing wrong first. Then yes, agreed, when the OP can understand and manage his finances he can sort it out over the year.

Besides, to be fair, I learn more looking it up and regurgitating what I have found.

[MarillionFan]

As usual NLs advice is simplistic and staid.

For example i pay my accountancy fees yearly, shortly after the financial year. Or office rental every quarter??? My telephone bill is quarterly. Hey what about a yearly rail card???

You don't really know your profit until the end of the year so to say it is 'illegal' to take out to much in a given month is riculous. The same goes with corporation tax. It's over the year, if you took too much out it's down as a loan and your accountant can work out any fees/interest. Just don't take the piss.

[northernladuk]

Assuming everything is fine at the end of year, and HMRC aren't investigating and combing through your bank accounts, I would think you'd be fine.

Even if they do, and everything adds up, would they try and fine you in some way?

The dividend would be be eligble for Tax and NIC's

[jmo21]

Assuming everything is fine at the end of year, and HMRC aren't investigating and combing through your bank accounts, I would think you'd be fine.

Even if they do, and everything adds up, would they try and fine you in some way?

[northernladuk]

Sort it out at the end of the year. It's not a monthly race it's a yearly marathon.

Really? I thought it would be wiser to get back to a reasonable status quo as soon as possible by using the directors loan or repay?

Quote I found

While drawing a dividend illegally will mean that a director is in breach of his fiduciary duties, and brings about an obligation to repay

EDIT...Ahh, something else ..

What if the company pays me too much?
If you take out more than you're owed, there may be extra tax to pay.

And it's illegal for your company to pay out more in dividends than it has available as profit for this year or profit held over from a previous year.

From http://www.freeagentcentral.com/supp...-is-a-dividend

So would go with MF's advice not mine lol
The OP mentions profit for the month, have you profit from the rest of the year or do you withdraw it all?