We recently reported on a tendency amongst some Ltd Company contractors toward paying illegal dividends (“Warning to Ltd Company Contractors: Don’t Use Your Business as a Personal Piggybank”). It’s emerged that HMRC has seen a ‘sharp rise’ in the number of such allegedly improper dividend payments in the last few weeks alone, according to Derek Kelly of Clear Sky Accounting – and it’s getting tough as a result.
From HMRC’s perspective, Ltd Company contractors who make improper dividend payments are not paying the full amount of tax, hence its sudden targeting of the practise. HMRC happens to be one of the largest unsecured creditors to firms experiencing insolvency; in the year to March 2010, the number of directors of insolvent companies facing disqualification leapt 17 per cent on the previous year to 2,169, according to figures from the Insolvency Service. Accountants working on the insolvency process for these firms uncovered a rise in illegal dividend payments and director loans, a discovery which has prompted HMRC to be more vigilant.
To avoid a savaging in this climate, Derek Kelly urges any contractor operating through a Ltd Company to employ the services of an experienced contractor accountant to ensure that the dividend paperwork is correct. The most common cause of the recent impropriety is the payment of dividends when there are insufficient profits in the firm to warrant them. HMRC considers this ‘trading insolvently’ – a practise which is unlawful – and has the power to redesignate the dividend as a director’s loan. The key to ensuring you don’t fall foul of the law is to make decisions on how large a dividend to pay only when your company’s accounting is fully up to date – only then can you be sure that the figure is based on the most accurate information about the amount of profit your business has made.
good points and the details are more specific than somewhere else, thanks.
- Thomas