Owner-managed businesses are using company cash holdings as a personal piggy bank, according to accountants
The number of directors taking illegal dividends is on the rise, according to the accountancy firm Wilkins Kennedy. Eight out of the last ten insolvency cases taken on by the company have led to investigations into illegal dividends or loans taken by directors. “It’s usually owner-managed businesses,” says Stephen Grant, managing partner at Wilkins Kennedy, “where directors have taken out dividends which exceed the distributable profits of the company.”
While historically these businesses may have produced the profits to cover the payments, says Grant, “during recessionary times profits have diminished, but the shareholders have not reduced their drawings from the company.” The sums recorded by Wilkins Kennedy vary from “as little as a few thousand pounds to a hundred thousand and more,” says Grant.
Grant says recession is not the only catalyst. The April increase in income tax to 50 per cent may have encouraged some directors to take larger dividends before the tax rise came into force. While some directors deliberately flout the laws for personal gain, Grant believes the majority of offenders are guilty merely of negligence. “What you tend to find with a lot of owner-managed businesses is that they don’t distinguish between themselves and the company. They just see [the company’s cash reserves] as their piggy bank, really. They don’t understand that to get it out of that corporate wrapper there are certain procedures they have to go through.”
HMRC treats all illegal dividends as loans, which can be taxed under section 419 of the Income and Corporation Taxes Act. Grant says insolvency practitioners are being warned by the government to watch out for the practice as part of a new drive to increase revenues, known as the “dash for cash”. In a bid to plug the tax gap, says Grant, HMRC is looking to enforce existing legislation more vigorously, as a more “politically acceptable” way to drive more tax than tax increases. HMRC is tightening up the enforcement of existing legislation,” he days.
Data from the Insolvency Service show that 2,169 directors of insolvent companies faced disqualification proceedings last year, up 17 per cent from the year before. “HMRC wants these directors banned and they want to pursue these directors through the courts for all the money that they can. That is an obligation that HMRC have, so directors need to beware of that,” says Keith Stevens, partner of Wilkins Kennedy.
