In order for a company to issue dividends, there have to be distributable profits available. These are the accumulated profits and losses to date, less any corporation tax payable, less any dividends already paid. These profits are then available to distribute to the shareholders.
When a dividend is paid, there should be a dividend voucher, along with a set of minutes considering and approving the dividend. HMRC is beginning to look at this more closely as part of their compliance procedures to ensure that companies have been acting in accordance with the rules and that individuals are correctly reporting income received.
For the tax year ended 5 April 2021 and beyond, we will be preparing the associated minutes and dividend certificates to support any distributions made in the tax year. However, if you’d like to do this yourself, we can provide you with a template that you can then reproduce each time a distribution is made.
Please remember that any dividends paid will be reportable on the personal tax return for that tax year irrespective of the company year-end date. For a dividend to be properly paid, it needs to have the minutes, the dividend vouchers and it has to be recorded in the company’s books and records. If you’re using a system such as Xero, this can be done by journal dated the date of the dividend voucher. It is not necessary to withdraw the funds at this point in time and you may choose to pay a dividend but leave the cash in the company to aid with cash flow requirements. That money will be available for shareholders to draw in the future without any further tax.
Finally, please be advised that when dividends are declared, these are not deductible expenses for tax purposes.