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Take care with dividends

Dividends are often seen by director/shareholders as a simple and fairly tax efficient way of extracting profits from a company. Care is often needed to ensure that the paperwork is correct and completed on a timely basis. In theory a dividend is the distribution of profits for the year. However in practice many dividends are paid out during the year rather than waiting to see what the profits are. This works fine while the company is profitable and has built up profits in the past.

However should the business be affected by the economic downturn and losses deplete any reserves built up in past years, problems can arise. A dividend paid could be considered illegal if there are insufficient profits to pay out. The payment may result in an overdrawn directors loan account, which needs to be repaid to the company. Should the company become insolvent then the individuals concerned would be pursued for this debt. It may be possible to clear the loan account tax efficiently, consider other strategies or merely ensure that these problems do not arise by involving us with every dividend payment.