Increasing regulation complexity brings with it an enhanced risk for business owners paying themselves ‘illegal’ dividends.
With many directors of owner-managed businesses paying a portion of their income as dividends, there is a material risk of directors becoming personally liable for company liabilities. Amidst the backdrop of the pandemic, and an upsurge in companies becoming insolvent, this danger has grown exponentially.
If the requirements of the complex rules regarding dividends and distribution are not met and the dividend becomes unlawful, the directors will need to take quick action.
The capital maintenance requirements of the Companies Act 2006 state any distribution can only be made where distributable profits exist, irrespective of the level of surplus cash in the business.
How profits are distributed is usually made by a business’s retained earnings in its last financial statements. However, directors must take into account the financial position of the company after the balance sheet date alongside the challenging economic climate.
In view of the pandemic, it has never been more vital to ensure appropriate accounting adjustments are made in any set of financial statements. If you would like any advice on financial planning for your own business, contact our Tax team on 01788 539000 or 0116 261 0061.