Before Approving a Dividend: A Construction Board’s Profit Check

A substantial customer payment lands, the bank balance looks comfortable and the directors start discussing a dividend. Before approving it, there is a different question to answer: what profits does the company actually have available for distribution?

For established construction limited companies turning over more than £1 million across Sheffield, Rotherham, Barnsley, Doncaster and wider South Yorkshire, that answer needs reliable accounts and current project information. Several live contracts can change the picture between reporting dates. The bank app is useful, but it has not read your contracts.

Available Profits Are Not the Bank Balance

Section 830 of the Companies Act 2006 allows distributions only from profits available for that purpose. Broadly, these are accumulated, realised profits not already used for distributions or capitalisation, less accumulated, realised losses not already written off through a lawful capital reduction or reorganisation.

That is not the same as turnover, gross contract margin or cash in the bank. Borrowing or a customer advance can increase cash without creating distributable profit. Equally, cash collection and profit recognition do not always happen together. An unpaid invoice is not automatically excluded from profit simply because payment is outstanding.

Ask for a reconciliation of available distributable profits, including earlier dividends, losses and the appropriate tax charges. A positive retained earnings figure deserves checking too: not every accounting reserve is available for distribution.

Identify the Accounts the Board Can Rely On

Section 836 links the distribution test to the relevant accounts, including profits, losses, assets, liabilities, provisions, share capital and reserves. Normally, the starting point is the company's last annual accounts. Where those would not justify the proposed distribution, interim accounts may be used, provided the applicable statutory requirements are met.

This does not mean any management spreadsheet automatically qualifies. Ask your accountant to identify the accounts that can properly support the proposed dividend and whether further preparation is needed. The Act expressly prevents reliance on accounts where the applicable requirements are not met.

Then review what has changed since those accounts were prepared. Do not treat last year's healthy results as permission to ignore known subsequent losses, dividends already paid or deteriorating contracts. A current management report can help the board understand those changes, but its role and suitability as relevant accounts need to be clear.

Bring Project Updates Into the Dividend Decision

The commercial team and finance team should agree the current position before directors choose an amount. This is not a fresh lesson in valuing work in progress, or WIP. It is a check that the proposed dividend uses accounts which reflect the evidence now available.

Review WIP against progress on site and the latest estimate of costs to complete. If extra labour, materials, rework or subcontractor charges have emerged, ask how they affect the accounts and available profits. Expected project losses and liabilities should not disappear simply because the next valuation has not arrived.

For retentions, confirm the contractual entitlement, release conditions, disputes and recoverability. For overdue invoices, distinguish a delayed payment from evidence that the recorded amount may not be recovered. Neither a retention balance nor an aged debtor report is a separate pot of distributable profit.

Ask your accountant how the applicable accounting treatment and realised-profit rules affect these balances. Do not assume all recognised contract income is distributable, or that everything must first be collected in cash. Unagreed variations and disputed claims deserve particular care. Optimism is welcome on site; it is less helpful as supporting evidence.

Keep the project schedules, explanations and calculations behind the decision. GOV.UK's company records guidance requires accounting records covering assets, debts and transactions, alongside supporting information such as invoices, contracts and correspondence.

Check Affordability and Record the Approval

Once the available amount is established, make a separate cash-flow check. Allow for wages, subcontractors, suppliers, tax payments and the working capital needed for the next stages of your contracts. Having distributable profits does not, by itself, make paying them out sensible.

GOV.UK's dividend guidance calls for a directors' meeting and minutes, even with a sole director, plus dividend vouchers stating the date, company name, shareholders and amounts. Give recipients their copies and retain the company's copies.

Check the company's articles and share rights as well. The approval route can differ for interim and final dividends; shareholder approval may be needed. Record the accounts reviewed, adjustments considered and reasons for the decision, rather than just the payment amount. Professional advice should inform the board's judgement, not replace it.

Three Actions to Take Next Week

1. Ask your accountant for a dated distributable-profits reconciliation and confirmation of the relevant accounts supporting the proposed dividend, including previous distributions, losses and tax charges.
2. Arrange a commercial and finance review of WIP, retentions, overdue invoices and revised project costs. Record disputed amounts and missing information, then agree any accounting adjustments before the board decides.
3. Prepare a cash forecast and an approval pack covering the articles, share rights, accounts, board minutes and vouchers. If the evidence is incomplete, defer the decision and obtain advice rather than choosing an amount from the bank balance.

A Clear Decision Before Money Leaves

If losses, disputed balances or financial distress make the position uncertain, pause and get tailored accounting and, where needed, legal advice. This is a practical review, not a substitute for advice on your company's circumstances.

Which project update could most change the dividend your board is considering?

For help connecting your construction accounts with a well-supported board decision, book a consultation with Tax by Sterling.