It is important to be aware that there is a strict legal framework covering the payment of dividends and failure to follow this can have serious consequences. We have set out below some of the key requirements which must be adhered to.
1. Consider the financial status of the company each time a dividend is made
The financial status of the company must be considered each time a dividend payment is made. The Companies Act states that a company can only pay a dividend if there are sufficient distributable profits out of which a payment can be made. If a dividend is paid that proves to be in excess of this profit or is made out of capital, then it is termed an illegal dividend. If a director authorises such a dividend, then the director can be deemed to have acted in breach of their statutory duties and may have to repay the funds amounting to the losses caused to the company, due to the payment of the illegal dividend.
2. Payment of a dividend should be backed up with reference to company accounts
Payment of a dividend should be backed up with reference to a company’s accounts which can either be the annual accounts or interim management accounts. Strictly, the accounts relied on must show the company’s assets and liabilities, its share capital and include provisions for any future liabilities, such as corporation tax.
3. Each time a dividend is paid, a minute must be prepared
Every time a dividend is paid, whether the dividend is interim or final then a minute must be prepared confirming there are sufficient distributable reserves and recording the shareholders right to receive the dividend. The minute should be signed and dated.
4. Monthly dividends are always open to attack by HMRC
In addition, monthly dividends are always open to attack by HMRC as salary payments and whereas there is nothing in the companies Act to say that such dividends cannot be paid, this process can be time-consuming as monthly management accounts should be prepared to back up the distribution. A shareholder’s resolution should be produced to ratify the declaration of the total dividend and to note when the payments will be made. This resolution must be signed and dated.
5. A dividend counterfoil should be prepared
Additionally, a dividend counterfoil should be prepared to support any dividend payment made. This is not a legal document but is required for tax purposes and must be made available to the tax department when the shareholder’s personal tax return is being prepared.
6. Prepare documentation for any dividend waivers
It is equally important to prepare documentation for any dividend waivers. When doing so it is necessary to ensure the level of retained profits is sufficient to permit the same rate of dividend to be paid on all issued share capital. Additionally, the waiver must have a commercial purpose, e.g., the need to retain more profits in the company for future expansion of the business.
7. If a dividend is waived, a formal deed waiver is required
If a dividend is waived, a formal deed of waiver is required, which must be signed, dated and witnessed and kept with the company’s statutory books. The waiver must be in place before the right to the dividend arises. An interim dividend must be waived before it is paid and a final dividend is payable once approved at an AGM, unless confirmed to be payable at a future date.
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