Newsletter Summer 2016

Dividend myths

There is a dangerous rumour kicking around that you can backdate a dividend to avoid paying the dividend tax that applies from 6 April 2016. This is total nonsense.

To be clear: a dividend can’t be backdated. Under company law the dividend proposal must be voted on by the company’s directors. The dividend can be paid out after that approval has been given.

The dividend need not be paid in cash; it can be credited to the shareholder/director’s account within the company. However, the dividend is taxed at the date it is paid to the shareholder, or credited to the shareholder’s account within the company, not by reference to the date when it was declared and voted on.

If a dividend was declared and approved before 6 April 2016, and paid out after that date, it is taxed in 2016/17 and it will be subject to the dividend tax. The only way that a cash dividend received in 2016/17 can escape the dividend tax is if it was credited to the shareholder/director’s account within the company before 6 April 2016, then at a later date the individual drew funds from that account.

The amount of dividend paid per share must be the same for all shareholders who hold the same class of shares. A company may issue different classes of shares to different shareholders, e.g. A-shares, B-shares, so it can pay a different amount of dividend to, say, the A-shareholders.

The company must have the relevant profits available (called distributable reserves) at the time the directors approve the dividend. That decision should be based on the company’s accounts, not simply on cash balances in the company’s bank account. We can help you determine if the profits are available to pay a dividend.