Directors of small limited companies have generally always withdrawn money from their companies on a monthly basis to ensure they have enough money to live on. This is usually done on in the form of a small salary topped up with dividends.
At the end of the financial year your accountant then calculates how much dividend can be declared and hopes it’s enough to cover the amounts withdrawn throughout the year!
This isn’t really the true nature of dividends. They are financial rewards which can only be declared if there are profits available after the calculation of estimated corporation tax. There are also compliance issues to be dealt with too.
With the advent of the new dividend tax allowance it has meant that interim as well as final dividends may need to be declared, if your financial year end falls outside of the tax year.
HMRC are clamping down on these procedures and with digital technology can now prove if dividends are taken and then declared retrospectively.
Read more here on how to protect yourselves:
Ensuring a proper paper trail for HMRC such as printing out a trial balance to show the company has made enough profit to declare an interim dividend;
Recording both interim and final declarations in the minutes of board and annual general meetings;
Completing dividend vouchers and distributing to each shareholder
These compliance procedures can often be overlooked by small companies but with recent case law where HMRC are reclassifying payments as employment it is essential you are covered or you could be looking at a large tax bill.
As we are also qualified Chartered Company Secretaries we can undertake these procedures for you to ensure you remain 100% compliant, so please just give us a call.