Distributable reserves are a company’s accumulated realised profits, less its accumulated realised losses, as shown in the “relevant accounts” named by Part 23 of the Companies Act 2006. Normally that means the last annual accounts circulated to members, but interim or initial accounts can be used if they meet the statutory conditions. Retained earnings on the balance sheet are only the starting point: unrealised gains, non distributable reserves and later distributions all have to be stripped out.

What does the law count as profits available for distribution?

Section 830 of the Companies Act 2006 says a company may only make a distribution out of profits available for the purpose. Section 830(2) defines those as accumulated, realised profits, so far as not previously used by distribution or capitalisation, less accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made. This is the realised profits test, and it applies to every company, private or public.

“Accumulated” means the test looks at the whole history of the company, not just the latest year. A company that made a profit this year but still has a deficit brought forward cannot pay a dividend until the deficit has been cleared. “Distribution” is wide: it covers any transfer of value to members, so a sale of an asset to a shareholder at undervalue, or an interest free loan to a shareholder director, can be caught as well as a cash dividend. ICAEW’s introduction to the law on dividends gives these as examples.

The Act does not list which profits are realised. Section 853(4) says realised profits and losses are those treated as realised under principles generally accepted when the accounts are prepared. In practice the generally accepted principles are set out in TECH 02/17BL, the joint ICAEW and ICAS guidance on realised and distributable profits.

Which accounts must the calculation be based on?

Section 836 says the answer is determined by reference to profits, losses, assets, liabilities, provisions, share capital and reserves as stated in the “relevant accounts”. There are three types.

  • Last annual accounts. These are the individual accounts last circulated to members under section 423 (section 837). They must have been properly prepared under the Act, or prepared subject only to points that are not material to the distribution. If the company is audited, the auditor must have reported, and if the report was qualified the auditor must have stated in writing whether the qualification is material to the distribution, with that statement circulated to members of a private company or laid before a general meeting of a public company.
  • Interim accounts. If the last annual accounts do not support the payment, section 838 allows interim accounts that enable a reasonable judgment to be made of the relevant items. For a public company they must also be properly prepared, have the balance sheet signed under section 414, and be delivered to the registrar before the distribution.
  • Initial accounts. A company that wants to distribute during its first accounting reference period, before any annual accounts have been circulated, uses initial accounts under section 839. A public company’s initial accounts need an auditor’s report and must be delivered to the registrar.

A parent company uses its own individual accounts, not the consolidated accounts. Its distributable profits come from its own activities and from dividends actually received from subsidiaries; profits still sitting in a subsidiary do not count. Section 836(4) is strict: if any applicable requirement is not met, the accounts cannot be relied on and the distribution is treated as made in breach of Part 23, even if the profits were in fact there.

What makes a profit realised?

TECH 02/17BL treats a profit as realised when it is received in the form of “qualifying consideration”. ICAEW’s introduction to that guidance summarises three routes, only one of which needs to be met:

  • Cash collected by the balance sheet date.
  • A receivable where the debtor can settle within a reasonable period, there is reasonable certainty it will be able to settle when called upon, and there is an expectation it will be settled. Ordinary trade debtors usually pass. Intra group balances with no expectation of settlement may not.
  • An asset readily convertible to cash, valued using observable market prices for immediate conversion without negotiation or marketing. Gains on quoted shares are likely to pass; gains on unquoted shares, illiquid derivatives and property revaluations are not.

Losses are treated differently. Almost all losses are realised, so impairments, provisions and onerous contract losses reduce distributable profits straight away. TECH 02/17BL also contains “linkage” guidance: where a dividend or sale is circular or pre arranged, such as a subsidiary paying a cash dividend that the parent immediately reinvests in new shares, the steps are looked at together and the profit may be unrealised.

Which reserves can never be distributed?

  • Share capital and share premium. Section 610(4) applies the capital reduction rules to the share premium account as if it were paid up share capital. See the share premium account.
  • Capital redemption reserve. This is created under section 733 when shares are bought back or redeemed out of profits, and can only be used to pay up bonus shares.
  • Revaluation reserve and other unrealised gains. A revaluation surplus on property is unrealised until the property is sold or the surplus is used up through depreciation.
  • Merger reserve. TECH 02/17BL treats a merger relief reserve as a profit in law that is initially unrealised.

Reserves can also be created. Under article 3 of the Companies (Reduction of Share Capital) Order 2008, a reserve arising when a private company reduces capital supported by a solvency statement is treated as a realised profit for Part 23. See reduction of share capital.

Public companies face a second test. Under section 831 a plc can only make a distribution if its net assets are not less than called up share capital plus undistributable reserves, and only to the extent the distribution does not take net assets below that figure. Undistributable reserves include share premium, the capital redemption reserve, and any excess of unrealised profits over unrealised losses. In effect a plc must also cover net unrealised losses.

What specific adjustments does the Act require?

  • Depreciation on revalued assets. Section 841(5) treats the extra depreciation caused by a revaluation as a realised profit over the period, which is why companies transfer that amount from revaluation reserve to retained earnings each year.
  • Development costs. Section 844 treats capitalised development costs as a realised loss unless the directors decide there are special circumstances and explain that decision in a note to the accounts. See capitalising development costs.
  • Earlier distributions. Section 840 requires any distributions already made by reference to the same accounts, such as an interim dividend or payments for a purchase of own shares out of profits, to be added to the proposed distribution before testing it.
  • Distributions in kind. Where a company transfers a non cash asset, section 845 measures the distribution by reference to book value, so transferring an asset at or above book value is a nil distribution if the company has some distributable profits. Section 846 treats any unrealised profit in that asset’s carrying amount as realised for the purpose.

How might the calculation look?

Illustration only. A private company’s last circulated annual accounts show:

Item Amount
Profit and loss reserve £95,000
Of which: fair value gain on an unquoted investment taken through profit or loss £20,000
Revaluation reserve on the office £60,000
Share premium £10,000
Interim dividend already paid since those accounts £15,000

The revaluation reserve and share premium are excluded. The £20,000 gain on unquoted shares is not readily convertible to cash, so it is unrealised and comes out of the £95,000, leaving £75,000. Section 840 then requires the £15,000 already paid to be counted, so the most the directors can now justify from these accounts is £60,000. If they want to pay more, they need interim accounts showing further realised profits since the year end, including a charge for tax on those profits.

What if trading has worsened since the accounts?

The statutory test looks back to a fixed balance sheet date, which for a private company may be up to 21 months before a dividend is paid, as ICAEW’s introduction points out. The common law on capital maintenance looks at the position when the dividend is paid. ICAEW’s guidance for directors says that if realised profits in the accounts have since been eroded by losses, a dividend cannot be paid out of them to that extent. Directors also have to consider whether the company will remain able to pay its debts as they fall due. The formal mechanics are covered in how to pay dividends legally and interim and final dividends.

What mistakes cause problems?

  • Treating total “capital and reserves” on a micro entity balance sheet as distributable without analysing what sits inside it.
  • Counting revaluation gains on investment property that have been taken to profit and loss under FRS 102 as distributable.
  • Forgetting earlier dividends and buybacks made against the same accounts.
  • Using group profits when the paying company is a holding company with no dividends received.
  • Relying on management accounts as interim accounts without adjusting for tax, accruals and impairments.
  • Paying out of accounts that have not been circulated to members, or where the audit report was qualified and no auditor’s statement exists.

The consequences of getting it wrong, including repayment by directors and shareholders, are explained in director liability for unlawful dividends.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.