Dividends: payment procedures and practical issues

By Tolley

The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Dividends: payment procedures and practical issues
  • Procedure for valid dividend payments
  • Calculation of the dividend
  • Payment of the dividends
  • Dividends reclassified as salary

This guidance note is intended to give an overview of the procedures and some practical issues involved in making dividend payments from a limited company.

Procedure for valid dividend payments

Before undertaking work on preparing dividend documentation for a client, it is vital to ensure that any actions are in accordance with the requirements of any necessary professional body and that the services are covered within the terms of engagement as well as by professional indemnity insurance.

The payment of a dividend is governed by a company's Articles of Association. Unless otherwise stated, this will be in accordance with paras 102–108 of Schedule 1 to the Companies (Tables A to F) Regulations, SI 1985/805 (subscription sensitive).

There are essentially two types of dividend:

  • final dividends, and
  • interim dividends

There are slightly different procedures for the payment of each type, but the underlying principle is the same. The dividends must be authorised by the directors after suitable consideration of the company's distributable profit. A final dividend is simply distinguished by the fact that they are approved at the company's annual general meeting. This is done when the final accounts are signed off so there is an 'automatic' consideration of the company's distributable profits.

Procedure for payment of interim dividends

The procedure for payment of an interim dividend is:

  • establish the distributable reserves
  • determine the total amount to be distributed
  • calculate the dividend per share
  • hold a board meeting and prepare minutes approving payment
  • make payment to the shareholders and prepare dividend vouchers

See Example 1.

See also the Flowchart –

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