When taking dividends from a Company, it is essential that Directors ensure such dividends are considered ‘lawful’ (Limited Company) or ‘legal’ (PLC).

Section 830 of the Companies Act 2006 states that a Company should only make a distribution of profits from accumulated, realised profits which have not previously been utilised, less accumulated realised losses. In order to justify the distribution of profits, Company’s must reference to the last annual accounts, interim accounts or initial accounts (if declared during the first accounting period).

One area of particular importance is in relation to the revaluation of investment properties. Under FRS 102, investment properties are required to be revalued each year but such profits are not realised and therefore should not be distributed.

There is no requirement under UK GAAP to separately disclose realised and unrealised profits in the financial statements but it is essential that sufficient detailed records are kept in order to be able to distinguish between such profits.

In the case of unlawful/illegal dividends, HMRC may request that such amounts should be reclassified as loans to Directors due to the insufficient distributable profits. In this case, the following implications need to be considered:

  • The shareholders will need to approve all loans more than £10,000.
  • Such loans of more than £10,000 will need to be included on a P11D (provided the Director does not pay interest on the amount), which will be subject to Class 1A national insurance.

If you would like help in determining your available distributable profits, please call us on 0207 306 9100 or email us on info@arnoldhill.co.uk