DIVIDENDS – WHAT YOU NEED TO KNOW

Share on email
Share on twitter
Share on facebook
Share on linkedin

Managing and declaring dividends is one of the most common and important functions of a company director. It can be a complex and technical area and here we set out a  detailed guide to the more common considerations relating to dividends.

The following looks at a simple cash dividend and does not cover scrip dividends, dividends in specie or any other uncommonly encountered forms of distribution.

Conditions for paying a dividend

In order to properly declare and pay a dividend, certain conditions need to be met including,

  • Articles of Association: The articles of association of the Company need to be checked to ensure that they permit the declaration and payment of dividends and what procedural requirements need to be met. The Model Articles for Private Companies Limited by Shares, which SRC-Time uses for its company formations,  permit the payment of dividends by way of an ordinary resolution of the shareholders or the directors may decide to pay interim dividends. (Article 30)
  • Distributable Profits: A company may only make a distribution out of profits available for the purpose (section 830 Companies Act 2006). Profits available for the purpose means a company’s accumulated, realised profits, not previously utilised by distribution or capitalisation less its accumulated realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.
  • Ability to pay its debts as they fall due: This is particularly relevant in these uncertain times.  The directors need to consider whether, having regard to the whole of the Company’s business, and the actual and contingent liabilities inherent in the business, it is reasonably foreseeable that the dividend would cause the Company to be unable to pay its debts as they fall due. It would be unlawful for the directors to declare such a dividend.

Any director who is party to a decision to pay an unlawful dividend would potentially be personally liable for breach of his director’s duties.

Interim dividend or final dividend?

There are two standard types of dividends: interim and final dividends.

  • Interim Dividends: These are declared by the director(s) solely and are generally paid during the financial year if the directors so desire.
  • Final Dividends: These are recommended by the director(s) but are actually approved by the shareholders in a general meeting, or by written resolution. These are generally paid at the end of the financial year.

Legal differences

As well as the method of declaring the dividends, interim and final dividends are also treated legally in a different way:

  • Interim Dividend The declaration of an interim dividend does not generally create an obligation on the Company to pay the dividend or a right on the shareholder to receive it. In theory, an interim dividend can be revoked by the directors, before it is paid. Therefore, an interim dividend only creates a right for the shareholder when it is paid. This is generally the tax date of the dividend.
  • Final Dividend Upon approval by the shareholders, a final dividend creates a binding obligation on the Company to pay, regardless of when the dividend is actually paid. Therefore, the effective date of a final dividend will be the date of the shareholder resolution.

Practical Issues

An interim dividend must actually be paid to the shareholder. Simply holding a board meeting and preparing board minutes approving payment of an interim dividend is not enough. The directors have the power to pay an interim dividend if it’s justified by distributable profits. It can therefore be validated by a directors meeting.
A final dividend, however, is proposed by the directors and approved by the shareholders at general meeting. Unlike interim dividends it is not the date the dividend is paid but the date of the general meeting, supported by proper minutes.  To distinguish:

What can go wrong – an example

Martin and Omar have a company in which they are both 50% shareholders and directors.  Business is going well and they want to pay themselves a dividend, but they are concerned to get things right.  The company’s year-end is 31st March.

  1. If money was withdrawn from the company before 31 March 2020, the payment may have been an interim dividend and thus would be relevant to the 2019/20 tax year. Strictly, the dividend paperwork should have been prepared at or before the physical payment but what happens if the directors’ meeting was held, but they forgot to document their decision in writing at the time? As long as they wrote it up later, stating that the “dividend was paid on 31/3/2020” but dated the minutes appropriately, there is no problem.  All that has happened  is a delayed production of supporting paperwork, but both the dividend and the paperwork are still valid as the directors held the meeting before the payment and the payment was paid shortly after the meeting.
  2. If the money was not withdrawn from the company before 31st March 2020, but it was paid later, the only way that it can be a legitimate dividend for the year ended 31 March 2020 is for it to have been a final dividend for that year.  Here the key difference is  that the paperwork must have been prepared following a general meeting which took place before the financial year end. If the paperwork is created later and backdated, this immediately raises doubts with Companies House and HMRC as to whether there was actually a proper meeting and could be construed as fraud. This is therefore certainly to be avoided and the dividend would have, therefore, to relate to the following year ending 31 March 2021.

Impact of Covid-19

In the current crisis if the dividend payment is found to have been paid after the profits take a downward turn, then this dividend could be proved to be unlawful, as mentioned above.  It is therefore extremely important to keep your management accounting up to date to avoid such a situation arising.  Indeed, to support the dividend it is recommended that you keep a record of the reserves at that point in time to support the minutes and dividend paperwork.

SRC-Time are one of the South East’s leading accountancy firms in advising the self-employed and partnerships in all aspects of their tax affairs and we are able to assist in any issue raised above.

Our expert team is available to provide you with advice and can be contacted on 01273 326 556 or you can drop us an email at info@src-time.co.uk or speak with an account manager to get any process started.


Related reading

This website uses cookies to ensure you get the best experience on our website.

By clicking any link on this page you are giving your consent for us to set cookies.