Declaring Dividends

The timing of dividend declarations by companies is something which is coming under increasing scrutiny from HMRC.

With the introduction of Making Tax Digital (MTD) for Income Tax coming into force in 2023, HMRC may soon be able to see on a quarterly basis what dividends are being declared and with this comes the importance of being up to date with declaring dividends from companies to their shareholders.  Note that the finer details of how MTD will work for individuals are still to come.

Often, business owners will draw cash from their companies and clear this with a year-end dividend (in lieu of the money previously taken). The important thing is the timing of the dividend declared.

HMRC considerations

There has been a fairly relaxed approach from HMRC in reviewing when dividends are actually declared. However, now that most people have electronic accounting systems, it is becoming fairly easy for HMRC to check the timing of said decisions.

HMRC considers the backdating of a dividend for previously issued dividends to be a fraudulent activity.  HMRC could issue fines or penalties if this was discovered, but ahead of that, you could be left with a tax bill you did not expect if income levels are, for example double what you expected in that year under review.

Timings

Getting the timing of a dividend payment wrong could mean that HMRC treat the dividend as issued in the subsequent tax or accounting year, rather than at the time intended.  This may result in an overdrawn loan account for the shareholder at the financial year end. In addition, personal tax returns for the 2 years would also be incorrect.

As previously, the cash doesn’t need to be physically drawn on the date of the dividend, however the authorisation and the dividend documents should be physically produced on this date, along with the entry in the accounting software.

This also highlights the need for up-to-date financial information to be kept and perhaps a board meeting to take place by the company’s directors before the year-end to decide whether or not a dividend should be declared to the shareholders. This can often be where a company will need a bit of guidance and assistance.

If your company’s year-end is approaching or you are thinking of declaring a dividend and you would like to discuss this topic further, please contact us and we can discuss in more detail how we can help.

Where things could go wrong…

Here’s an example to consider

  • Say an individual’s loan account was £50,000 overdrawn at the company’s period end of 31 March 2021.
  • It was decided, after seeing the final figures, on 18 August 2021, that a dividend of £50,000 was declared and this would be dated 31 March 2021 and this would be credited to the individuals loan account in the company.
  • In this case, the dividend would be treated as being declared on 18 August 2021, the credit would be posted to the loan account within the company’s accounts for the period ended 31 March 2022 and therefore there would be an overdrawn loan to disclose in the company’s accounts for the period ended 31 March 2021.  The dividend would also be recorded in the individuals tax return for 2021/22 tax year.
  • If the dividend was declared and voted as at 31 March 2021, the credit of £50,000 would be posted to the loan account within the company’s accounts for the period ended 31 March 2021, there would not be an overdrawn loan account to disclose in the company’s accounts and the dividend would be recorded in the individuals tax return for 2020/21 tax year.

Next steps

If you have any questions about dividends, or would like further advice on tax planning, please do get in touch and our specialist tax team will be happy to help you.

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