Hi there Nicholas Campion here from 1st Formations. Welcome to another episode of
Whiteboard Thursday, where we provide advice on a wide range of business and company matters.
If you enjoy this video and find it useful, please give us a like and share it with your
friends and colleagues. But for now, let's get started. Today I want to walk you through
dividends and whether all shareholders receive them. Profits made by limited by shares companies
are often distributed to their shareholders in the form of cash dividend payments, and dividends are
issued to all members whose shares provide dividend rights, which is most of them.
This division of company profits in proportion to the number of shares held by each member,
which is also referred to as a distribution, can be described in terms of a dividend
rate. So, that's the actual amount that is paid in respect of each share, for example - £1;
or, a dividend yield. This is the dividend rate paid out per share, expressed as a percentage
of the current stock value. For example, if the dividend rate was £1, but the market value
of each share is £50, then the dividend yield is 2%. Now, dividend payments do not always
comprise the entire profit of an organisation. Many companies will decide to reinvest a portion
of their profit in their business. This is known as retained earnings. It is also worth pointing
out that companies cannot count dividends as business expenses when calculating Corporation Tax.
Furthermore, they are not allowed to pay out any more in dividends than is available from profits
already accumulated, and eligible for this purpose. These available profits are known as distributable
reserves or distributable profits. Now let's talk about the procedure for paying dividends. Broadly
speaking, there are two types of dividends - final dividends and interim dividends. Before we get
into those, we need to consider the general rules that apply to payment to both types of dividends,
as well as making the distinction between interim and final dividends. Number one - company directors
should hold a board meeting and agree to declare a dividend, either themselves or subject to approval
by the members. Minutes of the meeting must be kept even in the case of a sole director.
Number two - a dividend voucher must be created for each dividend payment and the following information
should appear on the voucher: the date of dividend payment; amount of the dividend; name of the company;
and the names of shareholders eligible to receive a portion of the dividend payment. And number three -
a copy of this dividend voucher must be provided to each shareholder eligible to receive
a portion of the dividend, and a further copy should be retained for the company's own records.
The rules for issuing and paying dividends can vary from company to company. Any specific company
procedures should be stated in the articles of association. A free dividend voucher template is
available from 1st Formations, and I posted a link to this in the comments section below.
Okay, let's get back to paying out dividends - final dividends are issued on the basis of
profits for the fiscal year. Directors will make a recommendation as to the amount of the dividend,
but they must seek approval from the shareholders at the general meeting or via written resolution.
At this point, the shareholders can decide to reduce the level of payment, but they can't
declare a higher amount.Once the final dividend payment has been approved, also known as being
declared, the company is obliged to pay this. And of course, we also have interim dividends,
which can be paid out at any time during the course of the financial year: this is subject to
any restrictions in the articles of association, and this form of dividend can be declared by
directors, without any need to gain approval from shareholders. Any decision to pay an interim
dividend must be on the basis of relevant interim accounts, which should be filed at Companies House.
If the interim dividend has been declared by the directors alone, there is no obligation to
actually pay it. The board can change its decision if the circumstances change. Next, I would like to
take a look at the duties of the directors when declaring dividends, as per the Companies Act 2006.
A company director must exercise reasonable care, skill and diligence, and must act in
the way they consider good faith: that is - most likely to promote the success of the company
for the benefit of its members as a whole. In short, when deciding whether to recommend the dividend
payment, the directors need to be aware of these duties and others contained in the relevant parts
of the Companies Act 2006. As such, they should first ensure they fully understand the rules
surrounding dividend payments and carefully assess the financial position of the company
in order to determine whether the level of dividend payments is appropriate.
Now, not only must dividend payments fall within the limits of available distributable reserves,
but they should also take into account the overall position of the company to meet its debt.
Directors who authorise dividend payments for which there are insufficient distributable profits
are personally liable for any consequent shortfalls. Furthermore, they can also be
held liable if a dividend is paid, when the company is insolvent, or they should have
reasonably foreseen cash flow problems. Technical guidance on distributable profits under the Companies
Act 2006 is available from the Institute of Chartered Accountants in England and Wales.
Now, up to now we've talked about the procedure, the rules, and the directors'
duties regarding the paying of dividends, but how were they actually paid? Well, traditionally
dividends were paid by cheque, but now it is more common for payments to be made using direct bank
transfer, although there will normally be a choice for the shareholder on how they are paid, and the
different methods available will generally be stipulated in the articles of association.
Sometimes dividends will be paid in the form of additional shares. This is known as a scrip
dividend. Often, there will be an option for members to receive a dividend either in the form of cash
or additional shares. One of the benefits of opting for a scrip dividend is that the transaction cost -
that is the cost of purchasing new shares, can be avoided; however, there is no tax advantage because
scrip dividends are treated in the same way as cash dividends for the purposes of taxation.
Dividend payments have a tax-free personal allowance. After this, they are taxed according
to the relevant tax bracket - which is basic, higher rate, and additional rate. The actual tax
rates for each bracket can be found on the GOV.UK website. At this point, it is worth mentioning that
some companies also offer dividend reinvestment plans, or drips, that provide members with more
shares instead of cash; however, there are important technical differences between drip and scrip
dividends. So far so good - dividends are pretty straightforward, right? Well, most of the time.
There are what we call multiple class of shares and dividends for the purposes of organising a
specific distribution of dividend payments. For example - ordinary shares - these may be separated
into alphabet classes, each assigned a letter to differentiate them. So, you might have for
example - A ordinary shares, B ordinary shares or C ordinary shares - a different dividend rate
can be then applied to each of these classes of alphabet shares. Then, we have preference shares:
these have a fixed rate of dividend which is paid out before the other share classes, meaning that
they take precedence over ordinary share dividends. Any remaining sums available for distributions are
shared between the holders of the ordinary shares, after the preference shareholders have been paid.
There are also cumulative preference shares: these are similar to preference shares; however,
if a dividend payment is missed or not paid in full, for example - as a result of insufficient
distributable profits, the shareholder will receive any shortfall in a future dividend payment,
when there are sufficient distributable reserves. Next: deferred ordinary shares. Holders of these
will not receive any dividend payment until the holders of other share classes have received a
minimum dividend, after which they will receive the same dividend as the other shareholders. Lastly,
there are non-dividend paying shares: these are issued when there is a requirement to
issue specific classes of shares where the holders are not entitled to any dividend payments.
It is worth remembering that any decision to create new classes of shares to distinguish
dividend rights should be approved by the members with an ordinary resolution.
The articles of association should also be amended if necessary, for example - if they don't permit the
creation of new classes of shares. Finally, let's cover the subject of dividend waivers.
There are occasions when the shareholder may choose not to accept a dividend. This is known as a
dividend waiver. The reason for waiving a dividend may be because it is preferable to keep money
in the company and reinvest this in running the business, as opposed to receiving a payment and
losing some of the profit through subsequent taxation of dividends and so forth. In such
circumstances, a deed of waiver should be used to give effect to a dividend waiver. In the case
of a final dividend, the waiver should be put in place prior to the dividend being declared, and in
the case of interim dividends, the waiver should be set up before payment. And there you have it.
So, we have covered the basic concepts of dividends, the procedure for paying them, the duties of the
directors in declaring them, multiple classes of shares, and also dividend waivers. Dividends can, in
many instances, be a simple matter; however, there can also be hidden complications that trip you up.
So, when in doubt always consult a professional advisor. At 1st Formations, we provide
affordable company secretarial advice on shares dividends and most company matters.
If you have any questions about what we have covered today, please ask in the comments section
below and we'll get back to you straight away. In the meantime, be sure to subscribe to our channel
to get more advice on limited companies, reporting requirements and tax obligations.
We're always happy to help, and we can't wait to hear from you. Until next time, cheerio.