There has been a fair amount in the technical press about directors’ overdrawn loan accounts, dividend payments and appropriate documentation. It’s worth our recapping on a few key points:
- Overdrawn directors’ loan accounts are essentially a problem, with exposure to beneficial loan interest rules and to S455 tax until repaid.
- An overdrawn director’s loan account can arise if money is withdrawn prior to it being available to the director to withdraw. Retrospective voting of dividends or bonuses do not fix the problem.
- For a dividend to be paid to a shareholder or shareholder/director, it must be either physically paid, or otherwise put unreservedly at the disposal of the shareholder. In either case, such dividend should be formally declared and minuted before or at the time of the dividend payment. Retrospective minutes are regarded as suspect.
- It is recommended that each dividend payment (especially interim dividends) are supported not only by appropriate minutes, but also by dividend vouchers.
- Dividend payments in excess of there being sufficient distributable reserves are ultra vires: the directors are not entitled to vote such dividends, and the dividends are illegal. As such, it is essential that directors take a view at the time of declaring each dividend, that adequate reserves exist. In most cases, this will be a review of the company’s management accounts, supported by a statement in the minutes that the directors have carried out such a review to confirm adequacy of reserves.
In all cases where we handle dividend payments for clients, we aim to cover these points. If you are managing this yourself, and have any queries on these notes, please contact us to discuss your procedures.
Last updated: 20 December 2018