Are your dividends legal?

HMRC has announced that in late in 2011 they will introduce a programme of Business Record Checks (BRCs) and in particular will be looking at dividends.

Therefore it is now time to consider how you vote dividends and to ensure that a correct procedure is in place so that HMRC cannot claim the dividend to be illegal, nor that inadequate records have been maintained.

Where regular amounts have been withdrawn as dividends the amounts will be deemed ‘illegal’ if at the date of each payment the interim accounts show that the profit cannot cover the distribution.

If a distribution can be made legally then the procedure to approve the dividend and the record of payment must be correctly maintained. 

The relevant date for an interim dividend is the actual date of payment because a resolution is not needed to confirm payment. An interim dividend can be varied or rescinded. It is important to note that HMRC consider the date of payment of interim dividends to be the date of entry in the company’s books.

Many accountants consider that backdating documents to confirm consideration of profit and payment of dividend is a paperwork tidying up exercise but technically it is fraud and again case law exists to support this position.

Failure to observe the correct procedure could lead to not only additional tax liabilities but interest and penalties as well.

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