Dividends only being paid to 1 shareholder
Discussion
A friend has a 10% shareholding in a small business. Dividends have been declared in each of the last 3 years but all of the dividends have been paid to the 90% shareholder.
I have checked Companies House and there is only 1 type of ordinary share with full voting rights and dividend entitlement.
My friend has queried this with the external bookkeepers who told them that the Director used the dividends to repay some of the balance on the Director's Loan Account.
This does not sound right to me but the bookkeeper was very dismissive of my friend's questions.
What do others think?
I have checked Companies House and there is only 1 type of ordinary share with full voting rights and dividend entitlement.
My friend has queried this with the external bookkeepers who told them that the Director used the dividends to repay some of the balance on the Director's Loan Account.
This does not sound right to me but the bookkeeper was very dismissive of my friend's questions.
What do others think?
Although it is normally expected that shareholders holding equal class shares should receive equal dividends, there is no obligation that this is what actually happens.
HOWEVER, for one shareholder is to receive a dividend and the other not, the one not receiving the dividend should sign a "Dividend Waiver" which is their acknowledgement that they were entitled to a dividend but chose not to take it.
HMRC can take an interest in such "waivers" but they are legal.
HOWEVER, for one shareholder is to receive a dividend and the other not, the one not receiving the dividend should sign a "Dividend Waiver" which is their acknowledgement that they were entitled to a dividend but chose not to take it.
HMRC can take an interest in such "waivers" but they are legal.
dave123456 said:
If there definitely is only one class of share then they should receive dividends. Can your friend speak to the other shareholder to clarify?
This is the part I have to admit to being coy about - the 2 shareholders are ex-husband and ex-wife and not really communicating.ralphrj said:
This is the part I have to admit to being coy about - the 2 shareholders are ex-husband and ex-wife and not really communicating.
This is usually the root of these issues. Share classes are set up when everything in a marriage/business partnership is great, things turn sour and one party takes a step back leaving the other party to run the business. They draw against the directors loan account and cover it with dividends forgetting the fact that the other party is still entitled to their share of the dividend. As Eric says, this can be worked around with a dividend waiver but this has to be signed by the person giving up their entitlement to the dividend. Not always the easiest thing to get when relationships have broken down.
ralphrj said:
A friend has a 10% shareholding in a small business. Dividends have been declared in each of the last 3 years but all of the dividends have been paid to the 90% shareholder.
All?1) Everything that was due to be paid to that 90% shareholder (by virtue of their shareholding), I.e. the 10% shareholder’s dividend was not paid at all;
2) The dividend of the 90% shareholder plus the dividend of the 10% shareholder (paid to a party not ordinarily entitled to receive it)?
LooneyTunes said:
All?
1) Everything that was due to be paid to that 90% shareholder (by virtue of their shareholding), I.e. the 10% shareholder’s dividend was not paid at all;
2) The dividend of the 90% shareholder plus the dividend of the 10% shareholder (paid to a party not ordinarily entitled to receive it)?
We believe it is 2). For 1) to be true the unpaid dividends would have to be included in the balance sheet as a liability. Friend met with the bookkeeper recently to ask why they had not received any dividends. The bookkeeper has confirmed that all dividends were either paid to the Director or used to reduce the balance on the Director's Loan Account.1) Everything that was due to be paid to that 90% shareholder (by virtue of their shareholding), I.e. the 10% shareholder’s dividend was not paid at all;
2) The dividend of the 90% shareholder plus the dividend of the 10% shareholder (paid to a party not ordinarily entitled to receive it)?
Eric Mc said:
Although it is normally expected that shareholders holding equal class shares should receive equal dividends, there is no obligation that this is what actually happens.
HOWEVER, for one shareholder is to receive a dividend and the other not, the one not receiving the dividend should sign a "Dividend Waiver" which is their acknowledgement that they were entitled to a dividend but chose not to take it.
HMRC can take an interest in such "waivers" but they are legal.
Definitely no dividend waiver.HOWEVER, for one shareholder is to receive a dividend and the other not, the one not receiving the dividend should sign a "Dividend Waiver" which is their acknowledgement that they were entitled to a dividend but chose not to take it.
HMRC can take an interest in such "waivers" but they are legal.
Thanks for everyone's input. It sounds like most agree that this does not sound correct. The bookkeeper was quite rude to my friend which I suspect is a bluff as they know they have screwed up.
I have advised my friend to put the same questions to the bookkeeper in writing with a request for a written response within 28 days. The bookkeeper is a member of ICAEW so my friend could register a complaint with them if the answers continue to be unsatisfactory.
I have also made my friend aware that under section 476 of the Companies Act 2006 their 10% shareholding gives them the right to request an audit. Unfortunately it is too late to request this for the accounts currently being prepared (due at Companies House shortly) but they can request it for the current year. I suspect that the bookkeeper is not qualified to sign an audit report as it is not a service listed on their website so another firm will have to be engaged to perform the audit work.
I have advised my friend to put the same questions to the bookkeeper in writing with a request for a written response within 28 days. The bookkeeper is a member of ICAEW so my friend could register a complaint with them if the answers continue to be unsatisfactory.
I have also made my friend aware that under section 476 of the Companies Act 2006 their 10% shareholding gives them the right to request an audit. Unfortunately it is too late to request this for the accounts currently being prepared (due at Companies House shortly) but they can request it for the current year. I suspect that the bookkeeper is not qualified to sign an audit report as it is not a service listed on their website so another firm will have to be engaged to perform the audit work.
MaxFromage said:
What does your friend want to get out of this long-term as the situation could be quite a useful bargaining tool? Also are they a director as well?
They are Secretary but not a Director. My friend wants to progress the divorce and leave the business but doesn't have the funds to engage a solicitor which is why they raised the question over the missing dividends.There has been talk of selling the business which has an estimated enterprise value of £3-4m so there is potential for both parties to go their own way with a comfortable future ahead of them. Ideally a sale would retain the dozen or so employees of the company who are currently caught in the middle.
Unfortunately the Director is not present in the business often and has drug problems which occasionally come to the surface with outbursts which makes communication much more challenging than it should be.
JonPH said:
Repaying a director’s loan has nothing to do with paying a dividend so this needs understanding.
If the company is worth £3m+ , and this is husband and wife without a pre or post nup, you want a divorce lawyer involved, who can also liaise with her company team.
Directors loans are generally used for a director to draw cash to live on during the year. At the end of the year the accountant and directors will make a decision on dividends, the dividends are then used to pay down the directors loan, rather than drawn down in cash. So there is a link, albeit rather tenuous.If the company is worth £3m+ , and this is husband and wife without a pre or post nup, you want a divorce lawyer involved, who can also liaise with her company team.
Director's loans can be in either direction -
the director owes money to the company
the company owes money to the director
The latter is preferable as it does mean that the director can receive money from the company without any tax implications whatsoever. The company is merely paying back money to the director that it owes to him/her
Obviously, if the situation is the other way around, i.e. the director is taking money out of the company and therefore building up a debt to the company (what is referred to as an overdrawn director's loan account) , there are a number of really serious problems with this -
Section 455 of the Corporation Tax regulations can levy a penalty Corporation Tax charge on overdrawn loan account balances at the balance sheet date
Loan balances greater than £10,000 are likely to be subject to PAYE Benefit in Kind charges
Overdrawn loan account balances can be cleared by voting a relevant dividend to cancel the balance - although HMRC is not fond of such transactions.. However, all the time the balance was in existence, it might still have been liable to BIK charges.
The basic rule is to avoid overdrawn director's loan accounts wherever possible.
If and when MTD comes in for limited companies, I think this is an area of a company's book-keeping that HMRC would be very keen to look at an a day to day basis - rather than just once a year.
the director owes money to the company
the company owes money to the director
The latter is preferable as it does mean that the director can receive money from the company without any tax implications whatsoever. The company is merely paying back money to the director that it owes to him/her
Obviously, if the situation is the other way around, i.e. the director is taking money out of the company and therefore building up a debt to the company (what is referred to as an overdrawn director's loan account) , there are a number of really serious problems with this -
Section 455 of the Corporation Tax regulations can levy a penalty Corporation Tax charge on overdrawn loan account balances at the balance sheet date
Loan balances greater than £10,000 are likely to be subject to PAYE Benefit in Kind charges
Overdrawn loan account balances can be cleared by voting a relevant dividend to cancel the balance - although HMRC is not fond of such transactions.. However, all the time the balance was in existence, it might still have been liable to BIK charges.
The basic rule is to avoid overdrawn director's loan accounts wherever possible.
If and when MTD comes in for limited companies, I think this is an area of a company's book-keeping that HMRC would be very keen to look at an a day to day basis - rather than just once a year.
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