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Tony Wickenden

It&#39s that time of year for many companies – the accounting year-end.

With no advance corporation tax due on dividends, the timing of dividend payments has no corporation tax implications. However, timing is very important when it comes to considering the

alternatives for extracting funds from the company for the benefit of the owner-manager. The two most obvious of these are pensions and salary/bonus.

For pension payments to be deductible against corporate profits, they need to be paid before the end of the accounting period. Simple.

For salary/bonus payments to be deductible, they need to be paid before the accounts are closed and signed off, which needs to take place at the latest nine months after the end of the accounting period.

Most advisers are aware of the financial advantages of paying dividends rather than salary – cash flow through later payment of tax and, crucially, the avoidance of National Insurance – no mean benefit, given current rates.

But while many advisers will be very familiar with the basics of dividends, the importance of the subject (especially where the adviser needs to convince other professional advisers of his or her professionalism) means that, for those who are really serious, there is a need to strive to become a dividend professional.

Let&#39s see what we can do to help in this quest. It is first worth knowing that dividend payments made by companies resident in the UK are charged to tax under Schedule F ICTA 1988.

All well and good but perhaps the first thing to understand and be able to determine is whether a dividend can be paid.

The procedure for operating PAYE will be familiar to most company directors. This is less likely for the payment of dividends. A company does not usually require express power to pay dividends.

However, sections 263-281 Companies Act 1985 provide that

distributions, including dividends, may only be made out of profits available for the purpose. The company&#39s accumulated realised profits, that is, capital or income profits less accumulated realised losses, broadly speaking constitute profits for this purpose (section 263 Companies Act).

The use of the word “realised” means that any paper gains, for example, relating to the increased valuation of a property, will not be included.

This realised profit test applies to all companies, private and public. However, public companies have to satisfy an additional test related to net assets.

Under this test, a public company can only make a distribution (pay a dividend) if and to the extent that its net assets exceed the total of called-up share capital and undistributable reserves. To determine the level of realised profits or net assets, reference has to be made to the company&#39s last annual accounts.

Any director who is knowingly a party to the payment of a dividend out of capital is liable to replace the amount paid. He can, however, claim indemnification from the recipient shareholders. Section 277 Companies Act provides that each shareholder who received such a dividend must repay the amount to the company. The payment of a dividend in this way has been held to be ultra vires the company.

The actual method of paying dividends will usually be set out in the company&#39s articles of association. Most companies follow the standard Table A articles in sections 102-108 Companies (Tables A-F)

Regulations 1985. Broadly speaking, they provide that the final dividend should be declared at the AGM and that the rate of dividend should be at the level recommended by the directors.

When declared, a dividend creates a debt enforceable immediately or in the future, determined by the payment date. The payment of the dividend is an actual distribution of part of the company assets. The two processes of dividend declaration and payment are quite separate.

In many cases, dividends will be considered as an alternative to a year-end bonus. However, where dividends are to be paid more frequently than annually, say, monthly with salary, then thought has to be given to the method of declaring such dividends.

In these circumstances, the declaration of interim dividends will be necessary. The directors would usually have additional powers to declare such dividends in the articles (standard Table A article 103) but these should only be declared if they can be justified by the company&#39s profits at the time. Thus, interim dividends can be paid without the usual formality but it would be advisable to pass a board resolution in respect of each interim dividend, as it is declared, to counter any possible argument that the payments are really salary.

If dividends are to be paid monthly, a resolution should be passed each month before the dividend is declared and payment made.

Alternatively, interim dividends could be declared at less frequent intervals and irrevocably credited to internal current accounts for the shareholders.

Although dividends must be payable to all shareholders, it is possible for a shareholder to waive his dividend. Such waivers may be necessary (but possibly difficult to obtain) where the reason for the dividend payment is to remunerate working shareholders but not to similarly benefit non-working shareholders.

Dividend waivers can be complex, have possibly unplanned tax

consequences and should normally be avoided.


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