A growing number of company directors are declaring illegal dividends or loans, according to a leading accountancy firm.
According to Keith Stevens, Partner of Wilkins Kennedy, eight out of the last ten insolvency cases he has taken on have led to investigations over the directors allegedly taking illegal dividends or loans from the company.
The accountancy firm says that the temptation by directors and owners of businesses to pay themselves an abnormally large special dividend before the increase in the highest rate income tax band to 50% on April 6 2010 may have triggered the spate of illegal dividends.
These special dividends would be considered illegal if the company did not have the accumulated profits to cover the dividend payment.
HMRC, who are usually one of the largest unsecured creditors to insolvent businesses, are now so concerned that illegal dividends mean businesses are not paying their tax debts that they are asking insolvency practitioners to specifically look for this problem.
Wilkins Kennedy explains that the recession has led to a minority of directors and business owners taking illegal loans or dividends to pay for the lifestyles that they have become accustomed to but which the failing fortunes of their businesses can no longer fund.
Keith Stevens commented:
“A couple of holiday homes, a taste for sports cars and an expensive divorce settlement will normally come with a big debt that needs servicing every month. For some owner-managers it seems easier to break the rules and take an illegal loan from the company than to curb their spending.”
“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.”
“Directors need to be careful not to treat their business as a personal piggybank.”
Data from the Insolvency Service show that 2,169 directors of insolvent companies faced disqualification proceedings in the year to March 31 2010, up 17% from 1,852 the year before.
For more information, try our guide to limited company dividends.