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Illegal Dividends

Posted by: edwinsmith on October 29th, 2010

It is common that companies, particularly ‘one man band’ companies, exceed the allowable amount of dividends that are paid to the company shareholders.

The amount of a dividend is restricted to the reserves available in the company.  Reserves are the current profit or loss, after considering Corporation Tax, plus the profit reserves from the previous years. Another consideration is the available cash if the dividend is to be paid when it is declared.

If a dividend is paid where there are insufficient reserves, it is deemed an illegal dividend.

It is important to be able to read and understand the company’s current profit and loss account and balance sheet to ensure that sufficient reserves are available before paying a dividend.

If an illegal dividend is paid, the creditors of the company can request that the shareholders repay the dividend to the company. This is because the cash used to pay the dividend should be used for the trading of the company and paying the creditors instead of paying a dividend that shouldn’t exist.

Having illegal dividends in the company accounts can also make the company look insolvent having negative balances on the balance sheet. This can affect the company’s ability to gain credit from a lender or suppliers and may breach current agreements with lenders or supplier.

There are tax consequences to consider if illegal dividends are paid:


  • It may provide HMRC with source to start enquiry.


  • It is also possible that HMRC may state that the dividends should be reclassified as loans instead of dividends due to the insufficient reserves.  This could potential lead to the company having overdrawn directors’ loan accounts if the directors are the shareholders.


  • If dividends are reclassified as loans, there are more considerations:


The shareholders will need to approval the loans if the loans are more than £10,000, even if the directors are the shareholders.

P11D forms will need to be completed to account for the ‘beneficial interest’ on loans of more than £5,000. This is because it is unlikely that interest will be paid to the company on the ‘beneficial loans’ - a loan received by way of your position with the company.  The current HMRC interest rate for beneficial loans is 4%. 

As with all P11D benefits, class 1A National Insurance will need to be paid by the company on the benefit.

The company will also have to pay HMRC tax of 25% on the overdrawn directors’ loan balances that still exist 9 months after the accounting period in which the loan was paid. This tax relates to s455 of CTA 2010 formerly s419 of ICTA 1988.  Once the loans are repaid, the tax will be repaid to company 9 months after the accounting end date in which the repayment is made.  Partial repayments attract a pro rata refund.

It is possible to write off directors’ overdrawn loans in the accounts but adequate reserves are required to do this.  The write off is treated effectively as dividend income, if the correct procedures are carefully followed.  There is also a chance that Corporation Tax relief will be given on the write off but again the correct procedures must be followed and the correct paperwork must be completed.  This however, is a contentious issue with HMRC. Please contact us before considering this option.

Please contact us if you would like to discuss this further.

Filed under: Tax

Company Tax Returns & Company Accounts To Be Filed Online With HMRC

Posted by: edwinsmith on October 22nd, 2010

From 1 April 2011, company tax returns for accounting periods ending after 31 March 2010 must be filed online with HMRC using a format called iXBRL.  The accompanying computations will also need to be filed online in iXBRL with the company tax return.

There are only two situations where a company or unincorporated organisation may be exempt from online filing with HMRC. These are:


  • If the directors and company secretary are all practising members of a religious society or order whose beliefs are incompatible with the use of electronic methods of communication. If this applies to you, you should write to your Corporation Tax Office providing full details and they'll advise you whether the exemption applies. 
  • If your company or organisation is subject to a 'winding-up order', is in administrative receivership or is being managed by an administrator you don't need to file your return online and can adopt the approach currently allowed in these circumstances. If you need to know more about this, please contact your Corporation Tax Office.


There will be penalties charged by HMRC if the company tax return, computations and accounts are not filed online and in the correct format by the due date.

Also, from 1 April 2011, payment of Corporation Tax must be made electronically.

HMRC and Companies House have a joint online filing system.  The principle of joint accounts filing is that companies will be able to enter their accounts data once, before submitting separate accounts to HMRC and Companies House.

The joint filing service is aimed at smaller companies with relatively simple tax affairs, who prepare accounts under the Companies Act 2006. It is not suitable for companies who are required to have an audit.

Also, you will not be able to use the joint filing service if you need to prepare group accounts or accounts for a company that is a member of a group, or if your accounts need to show any of the following:


  • turnover over £6.5 million
  • cash flow statements
  • foreign income and currency transactions
  • prior year adjustments
  • profit or loss on disposal of fixed assets of a material nature. 


You can use the joint filing service to submit the following types of company accounts, for accounting periods starting on or after 6 April 2008:


  • Statutory accounts to HMRC and/or Companies House.
  • Abbreviated accounts to Companies House.
  • Accounts to Companies House for dormant companies.


As the deadline dates for filing accounts with HMRC and Companies House are different, the service allows you to submit your accounts to Companies House at a different time to the accounts you submitted to HMRC with your Company Tax Return.

The company accounts you submit to HMRC as part of your company tax return must always be the statutory accounts required by company law and not the abbreviated accounts some companies are allowed to file with the Registrar of Companies. The abbreviated accounts option is therefore only available for submitting accounts to Companies House.

Online filing with Companies House isn’t mandatory at present, so paper filing is still accepted.

Our accounting and tax software is already compliant with iXBRL so we are able to file company tax returns and company accounts online.

Please contact us if you would like to know more.

Filed under: Tax

Additional self assessment deadline to consider

Posted by: edwinsmith on October 7th, 2010

In addition to the self assessment tax return filing and payment deadline of 31 January 2011 for the year to 5 April 2010, there is a further deadline to consider.

If the tax due to HMRC for the year to 5 April 2010 is less than £2,000 then the amount can be collected through your PAYE code number for 2011/12, providing that you have active employment or pension income. This will spread the tax over the year to 5 April 2012 by increasing your monthly PAYE deductions, effectively paying the 2009/10 tax monthly from April 2011.

If you would prefer the option to pay this way then your tax return must be submitted electronically to HMRC by 30 December 2010 (or manually by 31 October 2010).

Please contact us if you have any questions or to discuss this further.

Filed under: Tax