Final Dividends are payments from company profits to shareholders after the financial year ends. The company’s Articles of Association determine how the company approves the dividend. Under the standard model articles, directors recommend the amount and shareholders declare the final dividend.
Shareholders then use an ordinary resolution, which means a simple majority supports the decision. However, shareholders cannot declare more than the directors recommendation under model articles.
This approval process separates final dividends from Interim Dividends. Under the model articles, directors can decide to pay interim dividends themselves.
When Companies Pay Final Dividends
A company needs enough distributable profits before it can pay any dividend. Simply, distributable profits usually mean accumulated realised profits minus realised losses. The Companies Act 2006 sets this rule.
However, cash in the bank does not prove that distributable profits exist. A company might hold plenty of cash while carrying accumulated losses. Equally, a profitable company might face tight cash flow.
Read more: Dividends Explained by Accountants
How Companies Declare Final Dividends
The exact process depends on the company’s Articles of Association. However, companies using the standard model articles will usually follow a clear sequence.
First, the directors review the company’s profits, cash position and future commitments. Next, the directors recommend a dividend amount. Then, the shareholders approve the final dividend through the required resolution. Finally, the company records the decision and prepares the divdend paperwork.
The company should also prepare a dividend voucher for each payment, which shows the:
- Date
- Company name
- Shareholder name
- Dividend amount
A properly declared final dividend may become enforceable immediately when the resolution gives no payment date. However, the resolution can specify a later payment date. In this scenario, the dividend falls due on that later date, which can affect the shareholder’s tax position.
How Final Dividends Affect Annual Accounts
The accounting treatment depends on when shareholders declare the dividend.
If shareholders declare it after the reporting date, no liability existed at that reporting date. FRS 102 tells the company not to record that later declaration as a year-end liability.
However, the accounts may need suitable disclosure. This distinction matters because shareholders often approve final dividends after the financial year ends.
When a Company Pays Too Much
A dividend can become unlawful when the company lacks enough distributable profits. This problem can arise even when the company has enough cash to make the payment.
If a shareholder knew about the problem, the company may require payment. Directors can also face serious consequences when unlawful dividends contribute to company losses.
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This article is for general informational purposes only and does not constitute legal or financial advice. While we aim to keep our content up to date and accurate, UK tax laws and regulations are subject to change. Please speak to an accountant or tax professional for advice tailored to your individual circumstances. Pi Accountancy accepts no responsibility for any issues arising from reliance on the information provided.