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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15758
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I have a client who took out £100k dividend from the company

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Hi I have a client who took out £100k dividend from the company back in 2013. It completely escaped my mind to declare that on his self assessment in January 2014. I know I can amend the return and send it again. But I have a further problem he was under the impression there is no tax payable on this because CT has been paid. The dividend which has already been declared is £35k which is his normal monthly payments to himself. So to sum it up £135k dividend and a huge tax bill which he is not expecting because in one of our conversations he assumed not tax due.
Question is how can I salvage this situation. I am extremely stressed its looking really bad on me that I didn't declare plus he is blaming me for the situation.
Is there anyway to defuse the situation and find a solution i.e split the dividend amongst two years. Pay back the money to the company ( unused part ).
Help please I am about to have a heart attack.
Submitted: 1 year ago.
Category: Tax
Expert:  TonyTax replied 1 year ago.
Hi.

Leave this with me while I take a look and draft an answer. It will take a while.
Customer: replied 1 year ago.

Please I just need to salvage this situation in the best way possible legally otherwise I think i may end up in court.

Expert:  TonyTax replied 1 year ago.
I'm back.

I'm afraid there is no easy solution for you. Everybody makes mistakes. You just have to accept it, face the consequences and move on. Frankly, your concern should be to help your client after amending the 2014 tax return and get him to pay the tax due which is racking up interest charges and penalties right now.

Short of cooking the books which is not what I would do, you just have to come clean. I make a point of telling all my company owner clients that if their income is above a certain level in a tax year and that income includes dividends, there will almost certainly be tax to pay so that if they choose to breach the threshold, they know what the tax implications are. Some will listen, others won't but none will be ignorant of the rules.

If the accounting period during which the dividend was taken was still open, you might have considered repaying all or part of the dividend or treating it as a loan. If it was treated as a loan, it would need to have been disclosed in the company's corporation tax return and a Section 455 tax charge at 25% paid assuming it was still outstanding nine months and a day after the end of the accounting period during which it was taken out. The preferred treatment would have been to repay part or all the dividend, though if HMRC conducted an enquiry, they might have something to say about it.

If I were in your shoes, I'd face up to it, discuss it with your client, agree what to do with him and come clean with HMRC. He will probably expect you to pay the interest charges and penalties which will almost inevitably arise due to the size of the undisclosed dividend. If you have professional indemnity insurance, he might sue you which could leave you having to make a claim against your PI cover.

If your client tells you that he doesn't want to disclose the dividend and wants you to find a way around disclosure, then you would need to consider telling him that you can longer act for him. That's what I would do in such a circumstance.

I'm sorry I cannot give you an easy way out of your predicament. There isn't one. Let me know if you have any further questions.
Customer: replied 1 year ago.

Is it possible to assume the dividend happened in April? Still the same accounting period but new financial year.

Expert:  TonyTax replied 1 year ago.
Can you tell me what the start and end dates of the accounting period during which the £100,000 dividend was taken were please. Has the corporation tax return for that period been completed and submitted to HMRC?
Customer: replied 1 year ago.

The Accounting period is 1 July to 30 June .

Expert:  TonyTax replied 1 year ago.
Thanks.

So am I correct in that the accounting period during which the £100,000 dividend was taken ran from 1 July 2012 to 30 June 2013? Was it taken in one payment? If so, when was it taken?
Customer: replied 1 year ago.

This dividend is basically the profits after tax. But was taken in 1 July 2013 To june 2014. I was wandering it can be pushed to financial year 2014-2015. So sorry for carrying on. Tax needs to be paid no doubt. It's just the timing if can be tweaked.

Customer: replied 1 year ago.

No it was 1 July 2013 to 30 June 2014 when the dividend was taken but in December 2013

Expert:  TonyTax replied 1 year ago.
No apologies needed.

You originally said that the dividend was taken in 2013 and that the tax should have been paid on 31 January 2014. That's the impression I got anyway. Now you are saying that the dividend was taken in the year 1 July 2013 to 30 June 2014 and that the dividend was paid in December 2013.

Dividends don't have to be taken in the accounting period that they are earned in. Strictly, the date a dividend is declared and is available to the shareholder dictates when it should be disclosed for tax purposes. However, I know of several firms of accountants who have to take a pragmatic approach due to their clients not doing things properly at shall we say the lower end of the company client market.

What happens is that at the year end, the accountant produces a set of accounts and mops up all the drawings and declares a dividend as at the last day of the accounting period to avoid an overdrawn director's current account. The dividend is then disclosed in the tax return for the tax year in which the accounting period ended rather than across two tax years which will be the case unless accounts were drawn up to 31 March.

I always thought this could be problematic if HMRC looked into the company and saw the weekly or monthly drawings. However, a few years ago I read something possibly on the HMRC site and possibly not that effectively said that as long as a consistent approach was taken HMRC would not take issue with the treatment I outlined above. I think they recognised that many one man company directors treat the company bank account as an extension of their own and it would be impossible for some firms of accountants to function if they had to account for dividends on a strict payment date basis.

If the dividend was paid in December 2013 then it is strictly a 2013/14 dividend and the tax would have been due on 31 January 2015 which is an improvment on 31 January 2014.

I've been looking for the article I mentioned for some time but without success. If I find it, I'll let you know but there is food for thought for you there.
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15758
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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