| It will often be the case that a company is able to pay a dividend that exceeds its taxable profits in a given period. This may be because it has profits built up in previous years that have been retained in the company or because its taxable profits are lower than its accounting profits due to capital allowances. How does the new regime work then? Lawrence Ltd has taxable profits of £30,000 for the year to 31 March 2005 and £40,000 for the year to 31 March 2006. It pays dividends of £35,000 in July 2004 and £25,000 in July 2005. For the year to 31 March 2005 the corporation tax liability is £5,700 (£30,000 @ 19%). All profits have been paid out as a dividend. The ‘surplus’ dividend of £5,000 is carried forward. Even though it may have been paid out of previous years’ profits there is no carry back. For the year to 31 March 2006 the corporation tax liability is £7,481 (£30,000 @ 19% + £10,000 @ 17.8125% (the average rate)). In other words the amount deemed to be paid out as a dividend in this period is the £25,000 paid plus the surplus of £5,000 brought forward. If Lawrence Ltd is part of a group of companies the excess dividend of £5,000 will be reallocated to other group companies if possible in priority to being carried forward in Lawrence Ltd. |
| The new regime applies to dividends paid since 1 April 2004. What happens in an accounting period that straddles this date? Matt Ltd has a 30 June year end. Taxable profits for the year to 30 June 2004 are £40,000. The company paid a dividend of £10,000 in March 2004 and a further £15,000 in May 2004.
Period 1.4.04 - 30.6.04: 3/12 x £40,000 = £10,000 @ 19% = £1,900 (profits for this period have all paid out as a dividend in May 2004 and the surplus dividend of £5,000 is carried forward) |