Dividends For Directors
To pay a legal dividend it is not sufficient just to write “dividend “on the cheque stub or to make a dividend payment without the correct paper work. The following steps should be taken when a company is paying dividends to its shareholders in the future.
1. The directors should first review the profit available for the interim dividends. This is not the same thing as cash at bank, as you have to take account of the companies’ assets and liabilities and ensure there are sufficient funds to pay the creditors. Those deliberations should be recorded as a formal board minute, so if HMRC ever ask about the dividends paid you can prove the profits were there when the decision was made to pay an interim dividend.
2. If the final accounts for the year are complete and show the accumulated Profit and Loss Account is positive, the directors can recommend the profits which are not required for investment can be paid out as a final dividend to the shareholders. The shareholders can either accept the directors recommendation or suggest a lower figure of dividend. Both these decisions also need to be properly recorded at the time they are made as formal minutes of the meeting.
3. Dividend vouchers need to be prepared when either an interim or final dividend is paid for each shareholder showing the total net dividend due, the tax credit attached to the dividend and the date of payment.
4. The dividend should be paid by cheque or bank transfer from the companies bank account into the shareholders own bank account. If the shareholder is a director his or her director’s account in the company books may be credited with the dividend due to him or her. This should be done as soon as possible after the decision to pay a dividend is taken.
It is important that the decision to pay a dividend is made in advance of any cash being paid out of the company to ensure there is sufficient cash in the companies’ bank account to pay the dividends and the dividend payments do not cause the company to have a cash flow problem.
Article Courtesy of Stephen Brownlee @ SDB Accountancy www.sdbaccountants.co.uk/
