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COVID – 19 Small & Medium Business Directors & Shareholders – DIVIDEND ISSUES
Unfortunately, it is inevitable that some companies as a result of Covid-19 may struggle to survive. There are also important knock on effects to be aware of, concerning dividends becoming unlawful payments made by your company and this is an issue that all small company director/shareholders need to be aware of where their company does not have significant cash reserves.
It is normal practice for SME business Director/Shareholders to receive a small salary via PAYE, and the rest of company withdrawals as dividend payments. In normal circumstances where companies are generating regular income and profits this is not an issue. However Covid-19 impacting companies’ capability to continue as going concerns may mean that income and profits dry up and the amount of reserves the company has from which dividends can be legally paid diminishes too.
If there is no company profit or very little left during this pandemic, you should be very cautious regarding making dividends payments unless you know historically from its latest accounts the company has large realised reserves and/or there is a decent amount of funds still in the company’s bank account when the dividend is paid. When considering dividends the legal points are these:-
- When directors ‘declare’ a dividend they have to consider the business since its last year end and any impacts on the company’s profit available for distribution.
- They must also review if the business remains a “going concern” and preferably have financial forecasts to reinforce that view and the profit available for distribution
- The business has to be solvent.
What you want to avoid is the situation whereby when the next set of accounts are prepared, it turns out there were not sufficient profits after tax or reserves from which dividends could legally be paid. In that situation you will end up with a Director’s loan which has tax consequences for the company and needs to be paid back to the company. The ultimate “worst case scenario” is where a company goes under with an amount owed by the Director to it by way of loan. Any administrator, receiver or liquidator who gets involved at that stage will look to the Director/Shareholders to physically pay the money back to the company before any winding up goes ahead and that can be a painful process.
Please speak to your usual contact at Argents ahead of paying large dividends in the current environment, or of course if there are cashflow issues in the company at present and long term viability is becoming an issue.