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HMRC is looking into undeclared dividends to ensure that income tax is not being missed out on. They have written to the directors of companies where despite profits being made, the balance of distributable profits has fallen, suggesting that undeclared dividends have been given out to shareholders.

The basic formula for distributable reserves for a company is opening profits, plus profit after tax for the year, less dividends, equals the closing profits balance. There are other things that can impact the balance, but they are more rare, so any drop in the closing balance generally indicates that dividends have been distributed.

HMRC has gone through a process of identifying companies where their reserves have fallen, suggesting the payment of dividends, but there has been no corresponding declaration of the dividends on the personal tax returns of those receiving them.

The letters sent invite the shareholders to reveal any undeclared dividends, but also requires them to respond even if they haven’t had dividends, with an explanation for the drop. They have 30 days to respond to the request or a full compliance check may be opened into the individual’s tax affairs. There could be a valid reason for the discrepancy – such as the dividends not needing to declared until the next return – but if tax is is owing, people are being asked to make a voluntary disclosure about what they owe.

Penalties for the non-disclosure of income, or the reporting of incorrect amounts can be up to 100% of the unpaid tax plus interest, so anyone who has received these letters are strongly advised to take the hint and respond within the timeframe.