As a business advisor and trouble-shooter to small medium and large companies for over 36 years the most frequently quoted troublesome issue for directors is the subject of dividends.

How do I take dividends? Should I be taking dividends? What if I take too much from my company?

These questions if left unanswered may not matter now but if the unexpected happens and the company needs an insolvent rescue such as a company voluntary arrangement or liquidation they can provide a ‘perfect storm’ for a director.

Generally the smaller the company in size the more likely it is for the director to run into difficulty. The larger companies usually benefit from having their own finance/accounting department whereas the smaller companies depend on an independent accountant and or bookkeeper.

As the larger companies are more likely to have an in-house finance director who is well versed on the subject of taking dividends I will focus on the smaller companies. For the purpose of this exercise let’s say we are defining a small company below 20 staff and no in-house finance/accounting help.

Dividends Not Entered into Register

The most common problems for smaller companies who do not have an Finance Director are created usually by the complete lack of any structure to the dividend taking process itself.

For example most directors dividends are taken monthly without a thought for entering into a register or issuing a voucher/certificate. These are real issues if HMRC investigates the payments and may conclude in actual fact the dividends are actually salary and back date tax and national insurance.

They could also conclude that the payments are loans and in which case are owed back to the company. There must sufficient documentation to support the dividend payment. If no documentation exists and HMRC rule the dividend was incorrectly processed it is technically possible to pay corporation tax and income tax on the amount taken at a marginal rate of 60% including N.I.

Directors Use Company Money as Their own

Many directors simply take money from their company when they want and let the accountant ‘sort the situation out’ later, after all it is the director’s money when all is said and done. Well no actually it is not as simple as that!

Unfortunately the money does not belong to the director it belongs to the limited company which is a legal entity in its own right. So, when you take the money from the company there will always be a tax implication one way or another. In addition as the company is a legal entity you are in effect taking money from a third party with all of the potential adverse repercussions if not processed correctly.

‘One man’ limited companies will typically use the company account as their own and take money as ‘drawings’ without setting aside any tax whatsoever creating all kind of HMRC problems for themselves and the company.

My usual moan on this subject is the often lack of proactivity of the accountant in this matter and no I am laying the blame at the door of the accountant, but they do share responsibility. Far too often accountants refuse to tackle an errant director taking too much from the company for fear of losing a client.

The vast majority of directors who contact me however complain the accountant did not ‘say anything’ or ‘warn them’ about the dangers of an overdrawn loan account, and the vast majority have no idea what this means to them. Somewhere in between is the truth of the matter but the sad reality is no matter who is responsible it is the director who is accountable.

Dividend Problems – When the Unexpected Happens

When the unexpected happens this is invariably when I get called in to rescue the director and or the business:

  • The loss of a major contract
  • A major debtor defaults
  • A key individual becoming seriously ill or having an accident

These are the most common unexpected happenings.

When HMRC asks for Taxes Owed

The final nail in the coffin occurs when HMRC ask for taxes owed and combines with one or all of the above. So, for example a combined corporation and or VAT tax liability for £30,000 will usually coincide with the amount the director owes the company. Inevitably the director has taken money from the company and not paid the tax due on the amount taken so is often added as a loan from the company to the director making the director’s position overdrawn. In simple terms the director owes the company money and becomes a debtor. HMRC will conclude that it is their money, rightly in most cases, that is now owed by the director.

Dividend Payment and Debt or an Insolvent Situation:

  • Cannot pay its bills when due (including HMRC tax bills)
  • The liabilities (including contingent liabilities) outweigh the company assets

If the company enters into an insolvent situation and has to be liquidated or indeed rescued and HMRC are involved they will insist on the amount owed being repaid, before any rescue is agreed. We rescue and advise directors from these situations almost every day of the week which shows how common a problem this is.

The good news is there are things that can be done but being proactive particularly where the company is struggling with insolvency and or considering closure. It is difficult to know who to trust and you can see what other directors have sad about us here on the testimonials page.

If you are losing sleep over money owed to your insolvent company or any director rescue challenges or concerns call 0800 074 6757.