"Deemed salary" versus legitimate dividends

[TheMrs]

Does anyone have a way of explaining to me what if any difference there is between these? We take a relatively small salary just above tax and NIC limits, as advised by accountant, and supplement with regular dividends taken out of legal profits. For domestic accounting reasons we would rather take these dividends monthly, at least until the company has built up a decent warchest into 2nd year trading.

So, I see a lot of stuff on forums etc about the Taxman deciding to treat dividends taken as salary and back charging NIC and PAYE accordingly, but I can't see why he can? Surely if you are legally able to take a small salary and a large dividend, and are actively encouraged to do so by every accountant worth his salt, how can the Taxman then decide that what you are really taking is all effectively salary. Err. Of course you are. If by salary he means "money on which to live and do all that other stuff that wages are basically for".

What am I missing folks?

[centurian]

What am I missing folks?

A lot, unfortunately. Maybe start with some of the search links, particularly IR35 to get a grasp of what it is all about.

Admittedly one very confusing aspect is that IR35 does not stop you from paying dividends at all - even if it applies to your situation. What it does, is levy an additional charge ("deemed payment") that just happens to be the same amount as if you had paid yourself 95% PAYE salary.

This is how HMRC effectively reclassify your dividends as salary. Technically it isn't reclassified at all - just that they "remind" you to apply this extra charge.

[Jessica@WhiteFieldTax]

Deemed salary is a specific charge arising from the IR35 legislation.

It has nothing to do with whether dividends are legitimate or not.

So long as dividends are paid (i) from profits (in practice that means you keep enough back to cover tax), (ii) in ratio to shares and (iii) are recorded properly then you won't run up on any rocks on that score.

Keep on the radar a possible change in rules around spousal shareholdings: Legislations been promised but isn't happening. If it does happen it won't effect dividend legitimacy, just which tax return they go on.

[philip@wellwoodhoyle]

There's a lot of hot air talked about HMRC reclassifying dividends as salary, but the fact is that they can't and don't. All you need to do is make sure that the dividends are legal and then you can tell any rogue tax inspector to beggar off.

If they deem you caught by IR35 or if the legalities of the dividend havn't been complied with (i.e. you didn't bother doing the paperwork), then that's a different story.

[psychocandy]

Timing of dividends makes not one jot of difference....

As others have said, IR35 does....

[TheMrs]

Thank you

Thanks everyone, that makes me feel a lot better. We have taken steps to assure ourselves that the contract is not within IR35 (albeit I know the goal posts can subtly change at any time). But we are as confident as possible about it.

It's now clear to me that I can continue to allow for dividends without concern, provided I continue to follow the specific rules of only taking legit profits, doing the paperwork and complying with the share split.

Much obliged.

[Gemma at Qdos]

Thanks everyone, that makes me feel a lot better. We have taken steps to assure ourselves that the contract is not within IR35 (albeit I know the goal posts can subtly change at any time). But we are as confident as possible about it.

It's now clear to me that I can continue to allow for dividends without concern, provided I continue to follow the specific rules of only taking legit profits, doing the paperwork and complying with the share split.

Much obliged.

Remember that IR35 is not just based on your contract. Even more important are your real working practices (day to day working relationship with your end client) which can change during the course of a contract and thus put you inside IR35. You will need to ensure your tax/NIC is paid correctly as and when this happens, if it does.