In cases of divorce and the family business, we often find recognition of dividend income an issue when we are reviewing income levels reported on the Financial Statement (or Form E).
Broadly a dividend becomes a taxable income for an individual when it is paid to him or her. Payment can include being credited to their Directors Loan Account. In this case, it is a journal entry or paper transaction and not a physical transfer.
Sometimes one party to the marriage has carried forward a large balance owing to them on their Directors Loan Account.
In a particular year, they might draw down a substantial sum. In a matrimonial breakdown it could be lavished on a new partner or that is the suspicion of the other party in the marriage.
The dividend declaration for that year may perhaps be lower than normal. Cue more suspicion and mistrust.
A dividend is recognised in the financial statements by reference to the date it is paid. This can be different from the date when the dividend is declared. If a dividend is declared prior to the financial year end of the Company, it should not be shown as a payment from reserves in that year. Disclosure of dividends declared and paid is no longer a mandatory disclosure in Financial Statements for micro-entities and smaller companies. Disclosure is recommended for Financial Statements prepared under FRS 1021A, but most accountants opt to restrict disclosure to the mandatory items.
Where the dividend tends to be the same or a similar amount each year, this can also cause confusion in terms of the right tax year for income tax purposes.
It should seem a simple matter to record dividend income on the Form E but may not always be so when it is a personal company involved.
Acting for family owner managed limited companies is our bread and butter. We are very happy to help in these circumstances to provide clarity.