As you may be aware Limited Companies are only permitted to pay dividends out of distributable profits.
Due to the Coronavirus Pandemic, you may have had profits available when the dividends were declared but due to the various lockdowns there is no longer the profit to cover the transaction(s). What happens next?
Unlawful distributions
Dividends paid where there are insufficient profits are classed as unlawful distributions. When a director shareholder receives a dividend which is unlawful, they must repay the dividend to the company.
In the current circumstances, you may be strapped for cash and simply unable to repay it and therefore the dividend has effectively become a loan to the director from the company.
Corporation Tax Charge on director loans
Be aware that unless the loan is repaid within nine months of the company year end there will be a 32.5% tax charge under s.455 Companies Act 2010 (CA). This tax is due and payable when corporation tax for the period would normally be paid.
Beneficial loan?
Another snag is the possibility of a benefit in kind charge in respect of beneficial loan interest on the director shareholder, where the loan is in excess of £10,000. In this instance, the loan value is added to the payroll and tax and NI will be due via a P11d reporting requirement, payable in July.
Repayment options
The ideal situation would be for you to get back on your feet and repay the loan before the s.455 charge kicks in. This gives you at least nine months from the company year end to find the funds.
You can do so by voting a dividend from post-lockdown profits to credit the loan account.
The alternative is to declare a bonus, however, this would be taxed as employment income attracting a higher NI charge (both for the director and the company) and losing the advantage of the dividend allowance.
If you are worried about your finances and would like to book a health check call with Esther then please get in touch (esther@a4cgroup.co.uk).