Just completed a clients limited company year end accounts. The client has taken too much out the company as dividends which has resulted in negative reserves.
There were only two dividend payments both of which were in the first quarter when sales were high. Unfortunately the company suffered from very low sales in the final three quarters which resulted in an overall loss.
Were the dividends taken in the first quarter illegal and if so what should I do?
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Stuart
Birmingham City FC - Blues is my religion St Andrews is my church
Dividends can only be declared out of distributable reserves.
If the dividends have resulted in negative reserves in the year end results then they are illegal.
Dividends will need to be transferred to the directors loan account
Dr Director Loan
Cr Dividend
so that the reserves are at least £0.
This may or not put the directors loan account into an overdrawn position. If the directors loan account is overdrawn then it has to be cleared within 9 months of the year end to avoid what was s419 tax consequences (basically 1/4 of the overdrawn balance has to be paid with CT as a payment on account). The overdrawn loan account could be cleared either by the director introducing funds into the company or by declaring dividends in the first 9 months post year end (if there is distributable profits in the next year).
There is also potentially Benefit in Kind issues if the directors loan account is overdrawn.
