28 February 2019
One of the problems for the small business owner is the tendency to treat the family company as a family money-box and anything taken out other than salary is, by default, a dividend. Unfortunately, it’s not that simple and there can be some nasty traps for those that think it is. There are two types of dividends and it is important to know the difference between them.
Interim dividends are paid out by the directors of the company (normally under the authority of the Articles of Association). They do not require the approval of shareholders but are only “paid” for tax purposes when they are physically paid or an entry is made in the books putting the amount at the unfettered disposal of the shareholder.
Final dividends, on the other hand, are recommended by the directors but need to be approved by the shareholders before they become valid.
Both types of dividend must, of course, be lawful and, amongst other considerations, this means that there must be sufficient distributable profits (after accounting for corporation tax etc) to pay the dividend. If the dividend is not lawful then it has to be paid back, it cannot then be re-categorised as salary.
Companies with so-called Alphabet Shares need to be even more careful. These shares give a company the ability to pay different rates of dividend to different shareholders but it is important that all the rules and rights attaching to the share structure are followed. The good news is that the recent scare over the changes in the rules to Entrepreneur’s Relief that could have been detrimental to some alphabet share-holders have largely disappeared following amendments to the Finance Bill.