Illegal Dividend

[sirp2000]

I have a new client with his own limited company. The filed accounts to 31 March 2010 show a dividend of £35000 but this creates a cumulative profit and loss account showing a loss of £30487. There was therefore only profits of £4513 on which a dividend should have been paid.

Is it possible to reverse this in the 31 March 2011 accounts which I have now been instructed to prepare? The silly thing is that the company owes my client £140000 through the director's loan account so it would have been much better for this to have been reduced to £105000 instead of a dividend having been shown in the accounts - apparently no dividend paperwork was prepared.

Any suggsestions on the best way to proceed would be welcome.

Thank you.

[RMC]

HMRC could treat the illegal dividend as a loan by the company to the client, not really a big deal in view of the large credit on DLA. The reason declaring the dividend was probably to use up the basic rate band in anticipation of better times ahead. Have large profits materialised?
A negative consequence of the illegal dividend might be that it may have deprived the family of tax credits (depending on spouse's income etc.). This cannot now be reversed.

[Lambs]

Care is needed as it is not automatically the case that the advance made to the individual may simply be offset by the credit balance on the DLA.

http://www.hmrc.gov.uk/manuals/ctmanual/ctm61550.htm

This is of course CTSA so in the first instance the decision as to whether or not the dividend is a repayable loan lies with the company itself.

However, it is not clear whether or not the "relevant accounts" would have supported the full dividend. If the company's distributable reserves to APE 31/03/09 would have supported the dividend but it made losses in the APE 31/03/10, then my understanding is that since the relevant accounts for the purposes of determining whether or not a dividend was 'legal' would be those to 2009, your client might be OK.

Please see http://www.hmrc.gov.uk/manuals/ctmanual/ctm20095.htm and in particular the section entitled "Relevant Accounts" although the full page may be of interest.

It is my experience that despite this being HMRC's own guidance, HM Inspector rarely understands the point, so be prepared for an uphill struggle even if the 2009 position saves your client!

Regards,

Lambs