Is My Accountant Being Aggressive re: Income Splitting Legislation?

[WordIsBond]

I've read a lot (here and elsewhere) on income splitting / wife as shareholder and/or director. AND, I've talked to my accountant. But I've only recently become a consultant, and I don't have a long-term relationship with an accountant, so I don't yet know how much I trust the guy I'm using.

I'm going to lay out the advice he's given me, and I'd like to ask the forum experts to tell me how aggressive they think this approach is. This will not only help me with this question, but also help me get a better idea of what kind of accountant I'm using, which can be helpful for me down the road.

Background: I've been happily married for several decades, and trust my wife completely (my accountant found a diplomatic way to ask about this before advising, which I see as a plus for him). I have two kids working for me doing billable work for clients (and a third doing a little bit of non-billable work on a project I've got going). My consulting work is bringing in a lot more than my kids' work. My kids want to be paid salaries to have salary history for when they do buy a house. (I know contractors can get mortgages, but it isn't always easy.)

Recommended company structure:
Two classes of shares, with equal voting rights. Class A (more than 80% of the shares) is split evenly with my wife. Class B is divided proportionally based on income being brought into the company. Each of us (me and my kids) divide our Class B shares equally with our spouse. My wife and I each get 5 Class B shares, Offspring #1 & spouse each have three, and Offspring #2 & spouse each have two. (No spouses have more than £3K other income.)

My wife and I to be directors.

Salaries:
Offspring #1 -- £30K.
Offspring #2 -- £20K.
My wife -- £8K. Accountant says I can't pay this much for bookkeeping / invoicing, but I can if my wife is a director.
Me -- £8K.

Dividends:
Class B dividends will be computed based on how much money I think offspring should be paid based on the revenue they've brought in. I expect this to run from £2-4K per share per year, which will take advantage of spouses' tax-free bands, give to offspring some of the tax benefits of dividends vs salary, and keep offspring out of higher rate tax (unless they get REALLY good contracts).

Remaining profit will be disbursed equally to my wife and I as Class A dividends. This is likely to be somewhere between £100-300 / share -- a lot less than the Class B dividends.

So, if 1 is cautious and 10 is aggressive, how would you rate this approach overall? Is my accountant being aggressive or not? And if it tends towards the "aggressive" end of the scale, what are the danger points? And are my points 1-5 just below sound?

My current understanding:
1. Splitting shares equally between my wife and I is entirely in the clear under current legislation.
2. Giving shares to my kids and their spouses should be in the clear as well.
3. Paying salaries to my kids is helpful because it helps to say to HMRC, "This is a normal family business," and reduces risk of investigation, etc.
4. Having two classes of shares IS aggressive and could draw unwelcome attention from HMRC.
5. Not sure about paying my wife £8K -- does her position as director (and the responsibilities and potential liability that entails) justify it? This seems aggressive to me, but I don't know enough.

Thanks in advance for any thoughts on all this.

[malvolio]

Between man and wife, assuming identical share classes, income splitting is perfectly fine. We spent a lot of money proving that.

Shares to other "connected persons" such as immediate family, is potentially open to challenge under S660 (unless the monies go to a trust fund or similar that you do not control and cannot access) so best avoided. Pay them a salary and leave it at that.

Mortgages are granted on credit history and risk, so low salaries from Daddy probably wouldn't help that much, but I'm no expert.

And the guy is an "accountant". An account is what you tell the police.

[Platypus]

My wife -- £8K. Accountant says I can't pay this much for bookkeeping / invoicing, but I can if my wife is a director.

I don't have an answer for this, but it's always baffled me how the tax man can apparently dictate a reasonable salary for a spouse doing the books (someone you trust and who won't defraud you and who is therefore worth paying more than average) vs. a company who pays some 'ex celebrity' businessman or MP many thousands just for being on the board and turning up to meetings one day a month.

It doesn't seem right. I'm sure it isn't right and I'd pay her what you bloody well please.

[tractor]

....

Why does it have to be so complicated?

Apart from the income splitting and the multiple classes of shares which are both red flags, it sounds like an awful lot of admin just to stay ahead of HMRC.

Why don't the two kids who are generating income set up their own companies like everyone else does. It costs £50 and less than half a day. They are then in control of their own salaries and you don't have to worry about their relationships from a business point of view.

They can either get their own contracts or sub through your company (but remember if you go this route, you will be responsible for the new reporting requirements). Sounds a lot simpler to me. The one who is not generating income can be employed by you PAYE.

Then you are unlikely to get more than a passing glance from HMRC and as long as your working practices are appropriate, IR35 is unlikely to come into the frame.

And I agree with Platypus, pay your wife what she is worth to the company not what the taxman says she should be worth.

[WordIsBond]

Between man and wife, assuming identical share classes, income splitting is perfectly fine. We spent a lot of money proving that.

Shares to other "connected persons" such as immediate family, is potentially open to challenge under S660 (unless the monies go to a trust fund or similar that you do not control and cannot access) so best avoided. Pay them a salary and leave it at that.

Mortgages are granted on credit history and risk, so low salaries from Daddy probably wouldn't help that much, but I'm no expert.

And the guy is an "accountant". An account is what you tell the police.

LOL. I fixed the typo, though you might have guessed I knew the difference since I got it right everywhere else.

My kids & their spouses will be getting less than they bring into the company themselves, so I don't think giving them shares is likely an income-splitting issue, is it?

[WordIsBond]

Why don't the two kids who are generating income set up their own companies like everyone else does.

<snip>

Then you are unlikely to get more than a passing glance from HMRC and as long as your working practices are appropriate, IR35 is unlikely to come into the frame.

IR35 would come into the frame. I'm working on the contracts they are working on, and I'm directing their work pretty extensively. IR35 is not an issue for me (and in part because I can use them as substitutes in some cases) but it would be for them as contractors or sub-contractors on the work they are doing. It would be very hard to make the case that they aren't disguised employees.

But employees are allowed to have shares and be paid dividends, as far as I know.

[WordIsBond]

It doesn't seem right. I'm sure it isn't right and I'd pay her what you bloody well please.

And I agree with Platypus, pay your wife what she is worth to the company not what the taxman says she should be worth.

Thank you both for this, sounds right to me.

[malvolio]

Thank you both for this, sounds right to me.

May sound right but there are other judgements who say that pay should be proportionate to work done. It's all messed up by this constant focus on aggressive avoidance.

AFAIC it's up to you what you pay people, as long as there is some kind of parity: £30k when all she does is dust the study as opposed to her running the calendar and doing all the bookwork and invoicing. That's why you use dividends rather than pay if she isn't actually doing real work (not that you other half isn't of course); divis are a reward for shared risk, salary is for services rendered.

[mudskipper]

Between man and wife, assuming identical share classes, income splitting is perfectly fine. We spent a lot of money proving that.

Just a minor point, but who is "We"?

I know you're not the (an) official voice of IPSE, so probably safer to refer to them in the 3rd person (assuming that's who you mean) to avoid confusion amongst those who may be under a different impression.

(Apologies to OP - not wanting to derail your thread)

[WordIsBond]

That's why you use dividends rather than pay if she isn't actually doing real work (not that you other half isn't of course); divis are a reward for shared risk, salary is for services rendered.

I guess one of my concerns revolves around this question: what is the value of the service rendered of being a director?

Because the book-keeping alone is probably not worth more than £1-2K. And there are other things she does to support the work I do, but it is stuff that would be hard to quantify if HMRC starts pushing.

Like, she is happy to bring me my dinner at my desk when work is pressing rather than insisting I come to dinner. She is willing to listen to me blather on about work problems sometimes. That kind of thing is worth a lot to me but I doubt it impresses the tax man when I explain why I'm paying her a salary.