Remuneration strategy for business owners: Are your dividend payments safe in the current climate?

Last updated 23 March 2020

Many company owners receive dividend payments and some on a regular basis.  However, with Coronavirus impacting our daily lives, it is important to carefully consider the impact this may have on the company’s current and future profitability, as this may affect the company’s ability to declare dividends and profit extraction.  In particular, if losses could potentially exceed accumulated profits, director/shareholders need to take particular care as noted below.

A balance will also need to struck between retaining funds for the business and what can be extracted by dividend from the company.

Please remember that the procedure for the payment of a dividend is;

• Establish the distributable profits
• Determine the total dividends to be distributed
• Calculate the dividend per share
• Hold meetings as necessary to approve the dividend
• Prepare the dividend vouchers and make the payment

It is this first point of establishing the distributable profits that will be crucial in this period of uncertainty.

Companies Act 2006, section 830 defines a company’s profits available for distribution as “its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made”.

Companies must ensure that reliable management accounts are used to ensure that profits are available, including adjustments for foreseeable losses and a Corporation Tax provision.  Looking at the bank balance is evidence of liquidity and not necessarily profit.

If distributable profits are not available to pay the dividends declared, the dividend may be illegal and must be repaid!  A very uncomfortable position for a business owner to be in, especially with the current climate.

One way to ensure you have instant access to reliable, real-time financial information from anywhere, at any time, is by embracing Online accounting.  Real-time financial information means you’re able to track how your business is faring, whilst empowering you to make the decisions needed during this difficult period.

Our team are on hand to help with your management accounts and provide advice and guidance with all your business and accounting needs.

See how we are driving businesses forward with online accounting here.