Reply To: Company Director – Dividends

Peter Barker

Just a few thoughts in no particular order:

Dividends are not part of the profit and loss account: they are paid out of post tax profits. A company cannot make a loss because it paid dividends.

A company can pay a higher dividend than the most recent year’s profit if it has made profits in previous years and retained the money in the company bank account – that might explain what has happened here.

Directors and shareholders are not necessarily the same people. Directors are officers appointed by the shareholders to manage the company for them. Dividends are paid to shareholders, usually in proportion to their shareholding – if two people have received different amounts of dividend, it could simply be because they hold different quantities of shares.

In the kind of companies run by benefit claimants, the directors and shareholders usually are the same people, indeed more often than not just one person is the sole director/shareholder

If the claimant is telling you that some or all of the money was to cover business expenses, this could be repayment of a director’s loan – the company was paying back to the claimant money that it owed to him. This often happens if the director uses personal banking facilities to pay for company expenses – these can later be accounted for as loans by the director to the company.

Small companies paying high dividends usually have an artificially high profit because they pay artificially low salaries for tax purposes. This raises two issues:

– Don’t hastily assume the claimant’s shares are worth a lot of money just because there was five-figure profit. if they were paying someone else to do the work, they probably wouldn’t have made as much profit, if any
– Notional earnings is the way to go: the company could have paid a proper wage instead of artificially splitting it between salary and dividends to enable the owner/director to benefit from multiple parallel tax allowances.