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A Company can pay a dividend to its shareholders on the recommendation of the directors.
There are two distinctly different procedures, the first in respect of interim dividends, the second in respect of final dividends.
Interim dividends for any accounting period are paid at the instruction of the directors, authorised at a board meeting, as recorded in a board minute.
An interim dividend is not recognised in a company's accounts until it is paid.
A final dividend for any accounting period is paid on the instruction of the directors, who will propose it at a board meeting and record it in a board minute, for approval by the members at a general meeting. The members cannot determine the amount of a dividend, but they can either vote for or against the resolution. Depending on the total votes the resolution will be passed or fail.
The members of a private company can approve the payment of a final dividend by passing a written resolution. Each member may sign and date their signature on the same copy of the resolution, or there may be multiple copies of the same resolution each signed and dated by only one member. The resolution is passed when holders of 51% of the shares have signed and dated the resolution.
An final dividend is not recognised in a company's accounts until it has been declared by the members in a general meeting. This is a change from previously accepted procedure which could include a proposed final dividend as a liability in published accounts.
In a small private company, all the dividends might be interim dividends declared by the directors without any final dividends being declared.
There are some common aspects to both types of dividend payments.
A typical resolution might be 'to pay a dividend of £x.xx per share on the ordinary shares on [future date] to shareholders registered on [an earlier date]'.
A company may have more than one class of shares, in which case the resolution must identify the class of shares - 'the ordinary shares', 'the "A" ordinary shares' etc.
Before the directors can propose an interim or a final dividend, the directors have to establish the amount of the company's distributable reserves, and propose an amount within those reserves.
A newly formed company will not have any distributable reserves. After a period of trading it may have generated a profit. The directors must provide for the corporation tax that will arise on that profit, before arriving at the distributable profit.
An established company may have retained reserves in its latest accounts. It may have to revise that figure of retained reserves brought forward to arrive at the distributable reserves brought forward, because there may have been a change in accounting standards since the end of that accounting period. The directors can then consider the trading result since that date, and the corporation tax that will arise on that result, in order to arrive at the distributable profit.
If a dividend is declared from distributable reserves, after the directors have ascertained those reserves, it will remain a valid dividend even if the directors calculations prove to be incorrect, or if the company subsequently loses money.
As dividends are declared 'per share', they are normally paid in ratio to the members shareholdings.
It is possible for a shareholder to waive their right to a dividend. It is not normal for a shareholder to waive a dividend. Why would anyone turn down a payment? It could happen when a major shareholder wants the value of the shares to be maintained in order to encourage other shareholders to invest in the company, or believes that the funds should be retained for investment.
A dividend waiver must be executed under seal and received by the company
before the dividend becomes payable. An example dividend waiver
(and as a Word
document) is attached. The timing of the events might be -
Monday - the directors declare an interim dividend to be paid on Friday to those
shareholders on the register on the previous day
Tuesday - a shareholder executes a waiver and delivers it to the company
Friday - the dividend is paid to those shareholders who have not waived their
entitlement.
The directors cannot calculate the proposed dividend per share in excess of the distributable reserves in expectation that any shareholders will waive their entitlement.
HMRC are known to investigate the tax affairs of companies and taxpayers involved in a dividend waiver. HMRC will consider whether the settlement legislation can be applied. The taxpayer waiving a dividend should retain detailed notes explaining their reason for waiving the dividend, preferably supported by evidence.
It is necessary to have evidence that an interim dividend has in fact been paid. Cheques drawn and cleared for the amount of the dividends are evidence of payment.
Sometimes a director / shareholder will have a loan account with a company from which they draw funds as required and as available. That shareholder may request that any dividend payable to them is credited to that loan account. HMRC sometimes consider that crediting a dividend entitlement to a loan account does not constitute payment. One way of avoiding this problem is to draw the dividend by cheque as in the last paragraph with the subsequent introduction of a lesser or greater sum as a capital advance to the loan account. Another alternative, which should be acceptable, but sometimes disputed by HMRC is for the minutes to specify that the dividend will 'be paid by crediting to the loan account on [the payment date]. Faxing a copy of that minute to a third party such as an accountant which is time stamped on receipt can provide independent evidence to support the declaration and payment of the dividend.
Similar evidence is required where an interim dividend is paid within a group of companies. Another alternative in this case is for the members to pass a resolution converting an interim dividend into a final dividend, provided this resolution is passed within the relevant accounting period.
A holding company should not make a loan advance to the subsidiary company in order to fund a dividend payment, or after the payment. HMRC will challenge the validity of the dividend.
If a company borrows in order to fund a dividend, HMRC may challenge the interest as a deductible expense on the basis that it is an expense of distributing profit and not an expense incurred wholly and exclusively for the purposes of the trade. It may be possible to ensure that the minutes record qualifying reasons for the borrowing.
Example resolutions and minutes for an interim dividend (and as a Word document) are attached as are resolutions and minutes for a final dividend (and as a Word document).
Table A provides that 'any dividend which remains unclaimed for twelve years from the date when it became due for payment shall, if the directors so resolve, be forfeited and cease to remain owing by the company.'
Reminder - disclaimer applies. Please feedback your comments. This page was last modified 13 June 2006.