Understanding Dividends

A dividend is a payout that companies make to shareholders that reflect the company’s earnings. These are paid out quarterly and the dividends provide stockholders with a steady return. Investors like to have a steady income, therefore, are more likely to buy a company’s stock. Investors also see a dividend payment as a reflection of a company’s strength and a sign of good management, thus improves expectations for future earnings.

Interim and final dividends
An interim dividend is a distribution to shareholders that has been declared and paid before the company has determined its full-year earnings. Whereas, final dividends are proposed by the directors and approved by the shareholders, normally at the end of the year. If a sole director who is also the sole shareholder, the company must document their actions in both capacities. It is not a requirement to pay dividends and they have the choice to decide not to pay any further dividends.

Formalising dividends
Taking dividends is the most tax efficient route since the tax is not payable on dividends. It is, therefore, important to formalise dividends to explain and justify the payment. It is important to formalise these payments to ensure it is classed as a dividend by HM Revenue and Customs to avoid implications. An incorrectly documented dividend could be subject to Corporation and Income Taxes.

Manipulation of distributions
Owners in small companies may seek to minimise personal tax liability but artificially adjusting the size of dividend payments to each shareholder. However, this needs to be done in an unacceptable and legitimate way. A dividend is legally a payment per share, therefore, they cannot receive a dividend that’s not equal to their share.

To ensure dividends are documented in the proper fashion, there are numerous templates that can be used and can be accessed in an easy-to-use spreadsheet here. There is a simple process to use that can make it much simpler to declare dividends. The first step is to declare an interim or propose a final dividend in a meeting with directors. Next, for finals only, shareholders resolve to approve the dividend. The next stage is to approve the documents, including; meeting minutes, shareholders approval, dividend vouchers and entry in dividend register. All parties then sign the documents and file them. Finally, payment of dividend occurs.

This post hopefully highlights the importance of correctly processing dividends to ensure further implications for HM Revenue and Customs. If you require any help or further advice on dividends, then visit this page or contact a member of our team with your queries and someone will be happy to get back to you.