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 be repaid if the director knows 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 adviser on the implications to both yourself and your company.
Until next time ...
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Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen has specialist knowledge and experience in tax planning and uses every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.
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