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Don't take risks when paying directors and shareholders

paying dividends to directors
During these difficult times when some private limited companies are experiencing a lack of profitability it is very easy for directors, who are also shareholders of the company, to get caught out by the common practice of paying themselves more money than the net pay of their remuneration with the intention of rectifying it by paying themselves dividends at a later stage.

Directors have to be aware that a dividend has to be legal.  That is, a dividend can only be a distribution of profit.  Therefore the financial position of the company needs to be considered each time a payment is made by the company to the shareholders.

A significant consequence of the payment of dividends could arise if the company goes into liquidation.  The liquidator or administrator should, as a matter of routine, review the conduct of the directors over the three years prior to insolvency. If it is found that dividends have been paid without there being the necessary undistributed profits then, in accordance with company law, the shareholders will be expected to repay the amounts deemed to be overpaid.

All companies should have proper procedures in place to declare dividends.  Although directors can authorise the payment of interim dividends, the final dividends need to be approved by ordinary resolution confirmed by a simple majority of shareholders.

A standard document should be prepared confirming that there has been due consideration given to the accounts before authorising a payment to the shareholders which should be signed and dated by the directors at the time of each payment. Risks are taken should the directors backdate documents to confirm consideration had been given to profit before the payment of dividends which have already been made. Case law demonstrates that this common practice is technically fraud.

Another issue to bear in mind is that HMRC are increasingly scrutinising payments that are paid to shareholders who are also the directors of the company. In the absence of proper procedures to declare dividends it might be difficult to persuade HMRC that these payments are not salary bonuses leaving them subject to taxation under the company’s PAYE arrangements.

There are many considerations when it comes to determining remuneration policies.  We are considering introducing a seminar that will address the practical issues associated with salary and remuneration schemes.  The intentionRegister your interest of the seminar will be to clearly explain how to devise schemes that will stand up to close scrutiny by HMRC and thus avoid unnecessary tax liabilities and penalties.

To help me gauge the interest in such a seminar I would like your quick feedback.  Simply send the email which says “yes, I would be interested in the salary and remuneration schemes seminar” to

In the meantime if you are asking yourself “how do we know whether there are sufficient profits to pay a dividend?" then I suggest you attend a three hour live online seminar, Understanding Financial Information, which I regularly present. This seminar helps people understand how profit is measured and whether the financial position of the company allows it to pay dividends.

We are here to help you get such vital matters right.

Stephen Smith
Managing Director
UK Training (Worldwide) Ltd




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