There have been developments in best practice regarding dividend payments from small companies. These are summarised here and will require your action if you are paying dividends from your company. These guidelines apply to all small companies that pay dividends.
Dividends are currently free of national insurance, and can have certain tax advantages. HMRC are increasing the number of compliance checks into whether payments recorded as dividends really are dividends. HMRC are also checking whether the dates of dividends are being recorded correctly. This can lead to problems with apparent overdrawn directors’ loan accounts and taxable beneficial loans. Also it is possible that HMRC could argue that payments are salary, in which case national insurance would also be payable. Penalties and interest can also be raised if HMRC find problems.
There can be no guarantee that HMRC will not find a problem with any dividend payment. The following procedures will minimise the possibility of a problem:
- Keep a clear record of all dividend payments from your company. We can use our spreadsheet template which is designed for this purpose, which can be downloaded here.
- For each dividend, hold a meeting of the director(s) prior to the issue of the dividend. Minute this meeting. The minutes must be printed, signed and kept. This still applies to single director companies.
- At the meeting, review the profit reserves of your company (after allowing for any current year tax), and keep a record of this review. Dividends can only be paid if there are profit reserves from which to pay them.
- Create, print and (importantly) sign a dividend voucher at the time of the dividend. It is recommended that this is then stored safely with the minutes and the notes on profits in a separate physical folder.
- If dividends are paid directly from the bank account ensure the bank statement reference includes “dividend”. Post an entry for the dividend in your records as a dividend as soon as possible.
- If dividends are to be credited to a loan account ensure this fact is recorded at the time of the dividend (e.g. email us this fact). Also ensure that the transaction is posted to the loan account immediately, at the time of the dividend.
- Prepare your personal tax return as soon as possible after 5 April showing the dividends.
It should be noted that it is unlawful to backdate a dividend. However if a meeting was held at the time, it is normal to type up and print out the minutes and vouchers after the dividend was declared.
If you would like to discuss this please book a chat about your business here.