60 second update: The practical procedures for payment of dividend templates for board minutes, dividend vouchers and dividend waivers.
The payment of a dividend is governed by a company's Articles of Association. Unless otherwise stated, this will be in accordance with paragraphs 30-31 of Table A.
Companies Act 2006 (CA 2006 (s830)) states that 'a company may only make a distribution out of profits available for the purpose'.
What this means is that the company needs to have sufficient retained profits (accumulated realised profits less accumulated realised losses) to cover the dividend at the date of payment.
1. Declaring dividends There are two types of dividends - interim and final.
Interim dividends are those which are paid throughout the year (monthly, quarterly, annually etc.) Before declaring an interim dividend, the directors must satisfy themselves that the financial position of the company warrants the payment of such a dividend out of profits available for distribution. The general meeting cannot interfere with the directors’ exercise of their power to pay interim dividends. Note that HMRC consider the date of payment of interim dividends to be the date of entry in the company’s books. CTM 20095 (8)
Final dividends are paid once per year after the end of each year. Where a final dividend is declared and the resolution fixes a later date for payment then the declaration creates a debt owing to the shareholder. However, the shareholder can take no steps to enforce payment until the due date of payment (or payments if by fixed instalments, see Potel v CIR (1971)). The ‘due and payable’ date in such circumstances is the date fixed for payment and not the date of declaration.
3. Taxation of dividend All taxpayers are required to pay tax on dividends above £5,000. The following rates apply:
Basic rate taxpayer – 7.5%
Higher rate taxpayer – 32.5%
Additional rate taxpayer – 38.1%
4. Ultra vires and illegal dividends As a brief reminder, dividends or distribution to shareholders may only be made out of profits available for the purpose. For interim dividends, full accounts are not required. However, the directors are required to have sufficient information available in order to enable them to make a reasonable judgement as to whether the amount of the ‘distributable profits’ at the date of payment is acceptable.
Any dividend paid in excess of this profit, or out of capital or when losses are made, is ‘ultra vires’ and, in effect, ‘illegal’.
The treatment of the improperly paid dividend is dependent upon the position of the recipient:
(a) If the recipient knows or has reasonable grounds to believe that a distribution or part of it is unlawful, then he/she is liable to repay it to the company. (b) If the recipient is not aware that an illegal divided was declared (ie shareholder of a quoted company), then no such liability exists. However, for private companies that are controlled by directors who are shareholders, such members are deemed to know the status of the dividend.
A significant consequence of the payment of an ‘illegal’ dividend might arise if the company goes into liquidation. If it is found that dividends have been paid ‘illegally’ to the directors over the three years prior to insolvency, the directors might be required to repay same to the company.
5. Dividend waiver There can be a number of complexities around dividend waivers. The process described looks at the process that is needed rather than explores case law. If a shareholder decides to waive his right to receive a dividend, he must do so before the date it is paid, via a formal deed.
A waiver should typically be used only for genuine commercial reasons, and not purely to avoid tax.
The company should have sufficient retained profits to pay the same dividend rate to all shareholders (including the shareholders who waive their rights to dividend). An alternative solution to a dividend waiver is for the company to issue different classes of shares.