How do dividends show in my accounts, and how much can my company pay?

FRS 105 paragraph 17.15: a micro-entity reduces its equity reserves for the amount of distributions to its owners (holders of its equity instruments). Paragraph 17.3: equity is the residual interest in the assets after deducting all liabilities; it includes owners' investments, plus additions earned through profitable operations and retained, minus reductions from unprofitable operations and distributions to owners.

Paragraph 2.25(b): recognised changes in equity comprise income minus expenses recognised in the income statement, plus contributions from equity holders, minus distributions to equity holders. Paragraph 2.26: only items that meet the definition of income or expenses are recognised in profit or loss.

Formats: the Section C profit and loss format ends at "Profit or loss" (item H) and has no dividends line. The balance sheet formats show "Capital and reserves" as a single item, and Schedule 1, paragraph 1(1A) makes the Section C items "the only items which must be shown". Schedule 1, paragraph 3(1): any item may be shown in greater detail than the format requires. Paragraph 6.2: the notes a UK micro-entity must give cover off-balance sheet arrangements, employee numbers, advances and guarantees to directors, and financial commitments, guarantees and contingencies.

Corporation Tax Act 2009, section 1305: in calculating a company's profits for Corporation Tax, no deduction is allowed for a dividend or other distribution, subject to any provision of the Corporation Tax Acts expressly authorising one. HMRC's Business Income Manual (BIM47106): "remuneration does not include entitlement to dividends etc arising in the capacity of shareholder".

SourcesThe law·HMRC·FRC

Paragraph 26.10: if a micro-entity declares dividends to holders of its equity instruments after the end of the reporting period, it does not recognise them as a liability at the end of the period "because no obligation exists at that time". Paragraph 2.14: a liability needs an obligation, to transfer an economic resource, that is a present obligation existing as a result of past events. Paragraph 17.6: an instrument whose holders are entitled only to a pro rata share of net assets on liquidation is equity; one that obliges the micro-entity to pay the holder before liquidation, such as a mandatory dividend, is a liability.

SourcesFRC

Companies Act 2006, section 829: a distribution is every description of distribution of a company's assets to its members, in cash or otherwise. Exclusions include fully or partly paid bonus shares, certain reductions of share capital, certain redemptions or purchases of own shares, and distributions on a winding up.

Section 830(1): a company may only make a distribution out of profits available for the purpose. Section 830(2): those are "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". Section 830(3): subsection (2) is subject to special rules for investment companies and Solvency 2 insurance companies.

Section 853(3): capitalisation means applying profits in paying up unissued shares to be allotted to members as fully or partly paid bonus shares, or transferring profits to capital redemption reserve. Section 853(4): realised profits and losses are those treated as realised "in accordance with principles generally accepted at the time when the accounts are prepared".

FRS 105 Appendix III, paragraph A3.11: determining distributable profits is "a complex area where accounting and company law interface"; any entity may refer to ICAEW and ICAS Technical Release 02/17BL, Guidance on realised and distributable profits under the Companies Act 2006, or any successor document.

SourcesThe law·FRC

Section 836(1): whether a distribution may be made without contravening Part 23 is determined by reference to profits, losses, assets and liabilities; certain provisions; and share capital and reserves (including undistributable reserves), as stated in the relevant accounts. Section 836(2): the relevant accounts are the last annual accounts, except that (a) interim accounts may be used where the last annual accounts would not justify the distribution, and (b) initial accounts may be used where the distribution is proposed during the first accounting reference period, or before any accounts have been circulated for that period. Section 836(3) and (4): the requirements of sections 837 to 839 must be complied with as applicable, or the accounts may not be relied on and the distribution is treated as contravening Part 23.

Section 837(1): the last annual accounts are the company's individual accounts last circulated to members in accordance with section 423. Section 837(2): they must have been properly prepared in accordance with the Act, or so prepared subject only to matters not material for determining, by reference to the section 836(1) items, whether the distribution would contravene Part 23. Section 837(3): unless the company is exempt from audit and the directors take advantage of that exemption, the auditor must have made a report on the accounts. Section 837(4): if that report was qualified, the auditor must have stated in writing (at the time or later) whether the matters qualified are material for determining whether a distribution would contravene Part 23; for a private company, a copy of that statement must have been circulated to members under section 423. Section 837(5): a statement covering distributions of a description that includes the one in question is enough, even if that distribution had not been proposed at the time.

Sections 838(1) and 839(1): interim or initial accounts must enable a reasonable judgment to be made as to the amounts of the section 836(1) items. Further requirements in each section apply where they are prepared for a proposed distribution by a public company (sections 838(2) and 839(2)).

Section 851(1): Part 23 is without prejudice to any rule of law restricting the sums out of which, or the cases in which, a distribution may be made. Section 852: it is also without prejudice to any enactment, or any provision of a company's articles, restricting them.

Sections 829, 830, 836 to 839, 847 and 853 have been in force since 6 April 2008. Later amendments: section 830(3) in 2016, section 837(1)(b) omitted under a 2013 instrument, and section 839(6)(b) substituted in 2009.

SourcesThe law

Companies Act 2006, section 840(1)(a): in determining whether a proposed distribution may be made where one or more previous distributions have been made in pursuance of a determination made by reference to the same relevant accounts, the provisions of Part 23 apply as if the amount of the proposed distribution was increased by the amount of the previous distributions. Section 840(1)(b) and (2) do the same for certain financial assistance and payments for the company's own shares made since those accounts were prepared. Section 840 has been in force since 6 April 2008.

ICAEW and ICAS Technical Release TECH 02/17BL, Guidance on realised and distributable profits under the Companies Act 2006, is professional guidance, not law. FRS 105 says any entity may refer to it. It states generally accepted practice at 31 December 2016 (para 1.8). Para 2.2: "Under common law, a company cannot lawfully make a distribution out of capital." The directors must therefore consider, both at the time of proposing the distribution and at the time it is made, whether since the balance sheet date of the relevant accounts the company has incurred losses that have eroded its profits available for distribution; the guidance gives no more detail, and says appropriate advice will have to be taken for specific circumstances. Para 2.3: the rule applies only to losses incurred up to the date of the distribution; expected future trading losses go into the cash flow assessment. Para 2.3A: directors must consider whether the company will still be solvent after a proposed distribution, taking into account any change in its financial position after the balance sheet date of the relevant accounts and its future cash needs. Para 1.15: the directors of a micro-entity should retain sufficient cash to pay its tax liabilities as they fall due. Para 2.10: a final dividend is made when declared in general meeting or, for a private company, by members' written resolution; an interim dividend under a directors' power in the articles is normally made only when paid. Para 2.29 restates section 840(1).

Section 851(1) (in the detail above) keeps any rule of law restricting distributions alongside Part 23.

SourcesThe law·FRC·Other sources