Interesting Tax Tribunal report on lawfulness of dividends:
The business paid interim dividends, and appears to have both correctly documented these and sought to ensure there were sufficient distributable profits.
Later the business went into receivership, and the dividends were re-classified as salary. HMRC proceeded against the shareholders personally, on the ground that they received salary with wilful failure to deduct tax.
In the Tax Tribunal it was argued for the taxpayer, and they won, that the reclassification from dividend to salary was incorrect. Once re-instated as dividends the liability HMRC were seeking to correct fell away.
Points to note:
~ watch the compliance for dividends. Availability of profits is important, this can be as easy as a simple statement of assets and liabilities at time of payment, and documentation, eg board minutes and / or dividend vouchers, although note for an interim dividend paying it is considered documentation – make sure the bank transfer and entries in company records say “dividend”
~ if things go wrong take a step back and don’t be pushed into something that isn’t correct – the liquidators advice in this case was wrong.
~ stand your ground with HMRC. They are not always right.