Commentary

D6.644 Making a valid payment of dividends

Corporate tax
Corporate tax | Commentary

D6.644 Making a valid payment of dividends

Corporate tax | Commentary

D6.644 Making a valid payment of dividends

This article highlights some practical points that invariably arise when profits are extracted by way of dividends; it does not purport to provide a definitive statement on the company law issues relating to dividends.

Payment of a dividend is usually governed by a company's Articles of Association. In the absence of anything to the contrary, this is in accordance with the Companies (Tables A to F) Regulations1. A final dividend must be recommended by the directors and approved by the company members in a general meeting. The directors may pay interim dividends if they are justified by the level of the company's distributable profit.

A company may not pay a dividend at all unless it has distributable reserves2. This is not necessarily profits of the current accounting period; it may include retained profits of an earlier accounting period. The ability to pay a dividend may therefore be inhibited where the company (perhaps temporarily) is making losses, whereas salary can always be paid, assuming that there is sufficient funding. In recommending a dividend, the directors must also have regard to the company's cash requirements and solvency, as well as the position of each shareholder. Remuneration policy involving significant dividends therefore tends to assume a consistently profitable company.

A final dividend is normally approved in the Annual General Meeting ('AGM') at which the annual accounts are also approved. Many small companies have dispensed with the need for an AGM; in this case approval of a final dividend is

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