Is this the end for dividends?
If your company accounts showed a loss at its year-end – and plenty of businesses will be in this position, because of the pandemic – does this mean a “no” for taking dividends? Dividends are a tax-efficient form of income, but can only be paid if there are profits at least equal in value. So, if you are a director shareholder and usually take your monthly income as dividends, but your company’s finances took an almighty hit as a result of Covid – you cannot resume taking dividends until you’re back in profit.
To establish whether you have enough retained profits for further dividends, you’ll have to consider profits, losses and distributions from previous years – it might be the case that your current losses would clear them out.
A scenario – overpaid dividends and good faith
Imagine a scenario where your financial year ended on 31 March. The “relevant (last annual) accounts” show retained profits of £50,000. So, based on its 2020 accounts, dividends could be paid off, say £30,000, a few months later. But! If 2021’s final accounts then show a loss – and remember, £30,000 in dividends need to be included here – which wipes all out retained profits, dividends could not be paid that year, due to insufficient retained profits. Even though you were acting in good faith at the time, with hindsight it is now clear that the dividends were overpaid and must be recategorised.
The problem is that HMRC might argue that any overpaid dividends are liable to PAYE and NICs, but “good faith” is the key and so the dividend should therefore be recategorised as a loan to director shareholders. To avoid future trouble with HMRC, further loans could be paid to director shareholders and repaid from dividends when there is enough profit.
With all the disruption of the lockdowns, you might have to make some changes as you return to profit. There are always options and with an option mind and pragmatic approach – as well as working with experts such as Figurit – you will find tax-efficient solutions and stay on the right side of HMRC.
For help with business or personal tax planning, call Figurit (formerly known as Lansdell & Rose) on 020 7376 933 or complete the form below.