New director, when can dividend be taken

[zedskidder]

Hi,

Currently have a company structure where party A is the sole director and shareholder but not a fee earner, and party B is a fee earner but is on PAYE, no shares. We want to change the structure so that party B becomes a director and majority shareholder, with the split becoming 30/70 A:B.

Can a company meeting be held to conclude this outcome and a dividend be issued to that effect immediately? Or does the appropriate paperwork have to be processed by Co. House first?

Thanks,

Mark

[Craig@Clarity]

A meeting and dividend can be issued with effect from when it was agreed and signed off and you don't need to wait for Companies House to be updated. However, saying that, the update to Companies House (if done on-line) is almost immediate anyway so it doesn't really make a difference.

Things to think about when issuing or transferring the shares is stamp duty and former "s660".

[northernladuk]

Get the agreement proposed and agreed in writing and signed off by all parties and get the Co House bit done as soon as possible to keep everything squeaky clean. Obviously we don't know the in's and outs of the prior structure but HMRC would be very interested in that arrangement with the facts given so better to dot the i's and cross the t's for the new one.

[zedskidder]

Why would HMRC be interested in the previous arrangement? Strikes me as perfectly normal for an owner of a company to employ someone to do work and hence make them money :/ Isn't that the essence of business?

[ASB]

There are of course also requirements to ensure the shareholder register is updated, stock transfer forms completed, exemption from stamp duty (if applicable).

There are potential CGT implications since the disposal of Party A 70% shareholding is clearly unlikely to be an arms length transaction, then there is the question of the valuation of the shareholding.

Naturally if party A and party B are married (or in a civil partnership) then there are different CGT rules etc involved.

The fact that B is becoming a director is an entirely different issue, but again the agreement needs miniting and co house need to be notified. Party B does not have to become a director simply because they are becoming a controlling shareholder.

[ASB]

Why would HMRC be interested in the previous arrangement? Strikes me as perfectly normal for an owner of a company to employ someone to do work and hence make them money :/ Isn't that the essence of business?

They wouldn't be particularly interested, save for the fact that dependant upon valuations and the relationship between A and B it is possible that various aspects of S660 could come into play.

[northernladuk]

Why would HMRC be interested in the previous arrangement? Strikes me as perfectly normal for an owner of a company to employ someone to do work and hence make them money :/ Isn't that the essence of business?

It does and it is all probably fine if we had more details. I would be interested in feedback from the other guys as I don't quite understand the switch so could be normal but to have all divis going to a non earner and the earner only getting PAYE looks odd. I am coming from the assumption the PAYE is getting 7K minimum or something and the rest of (and greater amount) is being taken by the non-earning directory. As I say, the devil is in the details which isn't on the mail or any of our business I guess.

[THEPUMA]

The other thing you need to be wary of is the employment-related securities legislation. Essentially, if the shareholder is being given shares by virtue of their employment, then they would be subject to employment taxes on the value of the shareholding received.

If A and B have no familial relationship (and are not unmarried partners), it is quite likely that this legislation could apply and this could be very expensive from a tax perspective.

This may have been what ASB was referring to when he mentioned valuations but I thought it best to elaborate given the potential substantial amounts of tax involved.

There may be other ways to acheive the same outcome but as others have said, we would need to know more detail of the circumstances.

PUMA

[psychocandy]

The other thing you need to be wary of is the employment-related securities legislation. Essentially, if the shareholder is being given shares by virtue of their employment, then they would be subject to employment taxes on the value of the shareholding received.

If A and B have no familial relationship (and are not unmarried partners), it is quite likely that this legislation could apply and this could be very expensive from a tax perspective.

This may have been what ASB was referring to when he mentioned valuations but I thought it best to elaborate given the potential substantial amounts of tax involved.

There may be other ways to acheive the same outcome but as others have said, we would need to know more detail of the circumstances.

PUMA

Agree with Puma here. It makes a difference if A and B are married or not.

[ASB]

This may have been what ASB was referring to when he mentioned valuations but I thought it best to elaborate given the potential substantial amounts of tax involved.

PUMA,

No, I was just considering the current "fair price" for the shares. Let us assume that the shares were originally issued as 100 x £1. Let us also assume the company has retained funds of 50k. Also that it is a bog standard close company. It seems to me a reasonable valuation to put on the 70% shareholding changing hands is 35k. Anything significantly different to this may require justification at a later date and the relationship between the 2 parties may govern whether CGT is due at this stage or not.