THE number of occasions when company directors have taken illegal dividends and loans has risen alarmingly, says leading accountancy firm Wilkins Kennedy.
Keith Stevens, a partner at Wilkins Kennedy, reports that eight out of the last 10 insolvency cases he has taken on have led to investigations over the directors allegedly taking illegal dividends or loans from the company.
The increase in the highest rate income tax band to 50% on April 6 2010 may have triggered the spate of illegal dividends, believes Wilkins Kennedy.
These special dividends would be considered illegal if the company did not have the accumulated profits to cover the dividend payment. HM Revenue & Customs, which is usually one of the largest unsecured creditors to insolvent businesses, is 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.
According to Wilkins Kennedy, 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.
Mr 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.”
Mr Stevens continued: “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 has, so directors need to beware of that.”
Mr Stevens added: “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.
Rise to 50% in income tax the trigger
