Many contractors, when deciding on a payment structure, decide to opt for the Limited company option for the tax advantages available by paying a low salary and dividends.
This article explains the documents that need to be produced when each dividend is declared.
Essential Dividend Documents
It is essential that whenever your company pays a dividend to you as shareholder, it must be formally declared at a director’s meeting.
Whilst it may sound daft to have a one man meeting and issue formal minutes, HMRC will ask for the board minutes of those meetings.
If the documents are not available, the Revenue would almost certainly argue that the payments were not in fact dividends at all but payments of net salary, which should be grossed up for income tax and national insurance.
This could be ruinous, especially if your company has made many dividends over a period of up to six years. This is why it is so important to prepare the board minutes and dividend counterfoils whenever dividend payments are made.
Who Prepares the Documents?
A common mistake is to assume that your accountant will simply “do the necessary” when you send in your books and records to prepare the accounts following the company year end.
The backdating of dividend paperwork would not be acceptable to HMRC. They may also argue that even if a dividend at the year end covered a number of payments during the year, those payments were outstanding director loans until the dividend was declared. This has unfortunate tax implications which are best avoided.
Preparing Board minutes and Dividend Counterfoils
It best to prepare the required documents at the time the payments are made to avoid any potential problems with HMRC.
Let’s look at some example for the following company and dividend details:
- Company Name: Bloggs Limited
- Company Address: 14 The Road, London, IR3 5NL
- Company Year End: 31 December
- Jonathan Bloggs is the sole director and Jane Bloggs is the secretary
- The company has two shares of £1 each, one owned by Jonathan and the other by Jane
Board Minute - Example
Board Minute
Minutes of a meeting of directors of bloggs limited Held at 14 the road, london, ir3 5nl On 31 march 2005
Present: J Bloggs – Director
It was resolved that the company pay a dividend of £9,000 per £1 ordinary share on 31 March 2005 to the shareholders registered on 31 March 2005.
..........................................
J Bloggs - Director
Dividend Voucher - Example
Dividend Voucher
Bloggs Limited
14 The Road
London
IR3 5NL
31 March 2005
To
Mr J Bloggs
14 The Road
London
IR3 5NL
Interim Dividend of £9,000.00 paid per £1 share for the year ended 31 March 2005 to shareholders registered on 31 March 2005
...........................................
J Bloggs - Director
Number of Shares Dividend Payment Tax Credit
1 £9,000.00 £1,000.00