Lee Sharpe takes a tax-centric look at what happens if a company pays dividends it cannot afford.
This article will look at ‘illegal dividends’ (perhaps more clinically, ‘unlawful distributions’) and the tax implications that flow therefrom. The focus is on owner-managed businesses and family companies – normally ‘close’ companies within CTA 2010, Pt 10 (s 438 et seq.).
It is important to note that HMRC in general is by no means the arbiter or authority on what constitutes an illegal dividend. It is a matter of company law, and more the preserve of lawyers and insolvency experts. Having said that, a company should (in theory at least) never pay an illegal dividend and, by implication, it is something with which all directors should be familiar.
Why are illegal dividends relevant?
The two main reasons why
