Dividend Payments During The Pandemic

Did you know that paying yourself illegal dividends means you could become personally liable for company liabilities? A lot of directors haven't considered this ...

It is very common for a company's directors to pay part of their income as dividends, but capital maintenance requirements and a director's fiduciary duties are highly complex aspects of tax legislation.

"If a dividend is unlawful, directors need to act!"

Any unlawful dividend is required to repay it in full if they know it was made unlawfully at the time of payment. Capital maintenance requirements included in the Companies Act 2006 mean dividends can only be paid where profits exist, regardless of the level of surplus cash the business has to hand.

This is determined by looking at the balance sheet; however, directors should consider their businesses financial position through the pandemic and beyond. If financial performance has deteriorated in the past 18-months since the first lockdown started, directors should draw up a set of interim accounts prior to deciding on any dividend payment.

Care should be taken to ensure the right adjustments are made due to the pandemic for:

- bad and doubtful debts
- surplus or obsolete inventory
- impairment of site premises which are not being used
- provisions of onerous leases
- early recognition of losses on non-profitable contracts

Other fiduciary duties include obligations to safeguard company assets as well as ensure it can settle its debts at any time. These debts include trade creditors and loan borrowing as well as pension contributions.

If you're a director wanting to take dividends from your business, especially during the pandemic, check with your tax advisor on the implications to both yourself and your company.

If you'd like to find out more about anything I've written here, do call me on 01908 774323 or leave a comment below and let's see how I can help you.