Taxman aware of sharp rise in illegal dividends

HM Revenue & Customs has been alerted to a sharp rise in the number of allegedly illegal dividends and director loans drawn by the owners of limited companies.

Warning that HMRC is aware of the "alarming" growth in potentially unlawful loans and distributions, one business advisor said tax officials were duty bound to track them down.

Keith Stevens, partner at Wilkins Kennedy, said eight out of the last 10 insolvency cases taken on by the firm have led to investigations over directors allegedly acting in this way.

The Revenue, typically among the largest unsecured creditors to insolvent firms, says it is concerned that unlawful dividends mean directors are not paying their tax debts.

As a result, the tax authority has approached insolvency experts to ask them to specifically look at the practice, which Wilkins Kennedy says has partly spread due to the recession.

Although it explains only a minority of cases, Stevens said unlawful loans or dividends have been arranged by directors to pay for a lifestyle that they have become accustomed to but which they can no longer afford.

"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," he said.

"For some owner-managers it seems easier to break the rules and take an illegal loan from the company than to curb their spending."

The accountant said other business owners paid themselves an abnormally large special dividend ahead of the increase in the highest rate of income tax to 50%, effective since April.

These special dividends, at the hands of owners or directors, would be considered illegal if the company did not have the accumulated profits to cover the dividend
payment.

"HMRC wants these directors banned and they want to pursue these directors through the courts for all the money that they can," Stevens said.

"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."

Figures from the Insolvency Service show that 2,169 directors of insolvent companies faced disqualification proceedings in the year to March 31 2010, up 17% on the previous 12 months.