Dividend Procedure

HMRC compliance practices mean that small companies paying dividends must take extra care to follow best practice dividend procedure. This summary outlines the key actions required to ensure your dividend payments are correctly documented and compliant. These guidelines apply to all small companies that pay dividends.

Why this matters

Dividends currently benefit from certain tax advantages and are not subject to National Insurance. However, HMRC has significantly increased its scrutiny of dividend payments, particularly focusing on:

• Whether payments labelled as dividends genuinely qualify as such
• Whether the correct dates and documentation have been recorded

Failure to meet HMRC’s standards can result in:

• Reclassification of dividends as salary (triggering National Insurance liabilities)
• Apparent overdrawn directors’ loan accounts
• Taxable beneficial loans
• Penalties and interest charges

Note: There is no guarantee HMRC will accept any dividend payment as valid without proper documentation.

Recommended procedures to minimise risk

To help ensure your dividend payments are compliant, we recommend the following steps:

1. Maintain clear records
   • Use our dedicated spreadsheet template to record all dividend payments
2. Hold a Director’s meeting before declaring dividends
   • Even for single-director companies, a formal meeting must be held
   • Minute the meeting
   • Print, sign, and securely store the minutes
3. Review profit reserves
   • At the meeting, assess your company’s profit reserves (after accounting for current year tax)
   • Dividends can only be paid from available profit reserves
   • Document this review
4. Prepare and sign a dividend voucher
   • Create a dividend voucher at the time of declaration
   • Print and sign the voucher
   • Store it with the meeting minutes and profit review notes
5. Bank statement references
   • If dividends are paid directly from the company bank account:
   • Include “dividend” in the payment reference
   • Record the transaction in your accounts promptly
6. Loan account credits
   • If dividends are credited to a director’s loan account:
   • Confirm this in writing at the time (e.g., email us)
   • Record the transaction immediately
7. File your personal tax return promptly
   • Ensure your tax return after 5 April includes all dividend income

Please note: It is unlawful to backdate dividends. However, if a meeting was held at the time, it is normal to type up and print out the minutes and vouchers after the dividend was declared.

If you would like to discuss this in more detail relating to your business, please feel free to book a free online meeting.