What sort of dividend?
You’re probably already aware that dividends for ordinary shareholders come in types: interim and final. A final dividend can only be paid with the shareholders’ approval after the company’s financial accounts have been finalised. An interim dividend doesn’t require shareholder approval but does need the board to agree to it, which in turn requires a board meeting. If the majority of the board can’t attend this can pose a problem getting approval for a dividend that’s needed quickly.
Due to a mix-up with the bank our example found himself without sufficient funds to complete a house purchase and very little time to resolve the problem. Fortunately, his company, of which he is one of the director shareholders, has more than enough cash and was only weeks away from finalising its annual accounts and paying a final dividend. The bad news was that the other directors were holidaying abroad and so not able to attend a meeting.
Usually, the dividend protocol for our example’s company was for it to pay a single (final) dividend each year. This wasn’t possible because its annual accounts weren’t finalised. The alternatives were either to pay an interim dividend or borrow from the company. The former requires only approval by the board while the latter requires it from the shareholders, unless it’s for no more than £10,000. Note – Larger amounts can be borrowed without shareholder approval depending on why the money is needed.
Abiding by the rules
Of course our example could simply have taken the money from the company account and settled up using cash from the final dividend when it was approved. However, as well as being contrary to company law, taking this sort of liberty would probably have caused trouble with his fellow directors. It could also have detrimental tax consequences.
Trap. While it’s unlikely that HMRC would pick up unapproved use of company cash, it might. A picky tax inspector could then argue that it counted as earnings (on which PAYE tax and NI contributions are payable) because without approval by the directors or shareholders it could not legitimately be either a loan or a dividend. If you think this sounds far fetched think again. This has happened more than once – while HMRC eventually backed down in each case it wasn’t before the companies clocked up significant accountancy fees in rebuffing HMRC’s arguments.
Tip. Don’t make advances of cash to directors until approval by either the board or the shareholders has been received.
Virtual solution. The good news for our example was that company law and the standard (model) articles of association allow companies to hold virtual board meetings. This means that a legitimate board meeting can be as simple as, say, a conference call or Skype meeting.