Thu, 2 Sep 2010

Illegal dividends and loans unexpectedly rise

An increase in the number of directors awarding themselves illegal dividend payments or loans from their company has risen ‘at an alarming rate’, according to a leading accountancy firm.

HMRC is so concerned at the number of company directors awarding themselves illegal dividends that they are asking insolvency practitioners to look into this. Keith Stevens partner of the accountancy firm Wilkins Kennedy and a licensed insolvency practitioner told Payroll World: ‘The Revenue is never slow in looking at ways it can recover tax.

They highlighted this practice as a cause of concern and actively encourage us as insolvency practitioners to look at this.

‘In many cases we investigated the directors said that they are only acting on advice from their accountants.
This will be a minefield for lawyers who will make a fortune out of this as directors will sue them for giving them incorrect advice.’

Mr Stevens believes directors had previously been able to finance their living by taking money out of the account and
then voting their dividends to reconcile the account at the end of the year, confident in the knowledge that their
accounts were robust enough to cope with this.

However, as a direct result of the economic downturn directors are continuing to take the money only to find that they no longer have the money in the account at the end of the year.

Wilkins Kennedy believe that the temptation by directors and owners of businesses to pay themselves an abnormally large special dividend before the increase in the highest rate income tax band to 50% on April 6 2010 is another factor which has triggered this spate of illegal dividends.

Mr Stevens warned: ‘Directors need to be careful not to treat their business as a personal piggybank.’

A spokesperson from HMRC told Payroll World: ‘There is no crackdown on directors. But HMRC has a responsibility to ensure everyone pays the correct amount of tax.’