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Dividends of prudence
Companies are only allowed to pay dividends if they have "distributable profits". That's a technical term from the Companies Acts, and it's usually based on the position shown by the last annual accounts. But you can pay a dividend out of the current year's results, as long as you have reason to believe that the company is in surplus at the time.
A recent case showed what can happen if you don't have those grounds. A company made a large capital gain, and did some tax planning to try to put off the tax charge on it. Expecting the plan to work, the directors paid out a dividend of the proceeds without allowing for any corporation tax. The Revenue objected to the plan, and assessed the company, but of course it didn't have any money left. So the Revenue sued the directors for breaking the law on distributable profits. The court agreed that the directors had been reckless, and ordered them to pay back enough to cover the company's tax liability.
That was an unusual situation. But it's a reminder that you can't just divvy out the cash in the company's bank account. Corporation tax has to be paid nine months after the year end, and you need to leave enough money to pay it.
If you want advice on how much dividend you can pay, we will be happy to provide it.
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The case referred to is IRC v Richmond and Jones (Re Loquitur Ltd), an action brought in the High Court by the Revenue under the provisions of the Insolvency Act.
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