Reply to: distribution of dividends

[ASB]

I would imagine that the chances of success in an action against the accountant are about the same as me waking up pope in the morning.

The terms of engagement are going to be key to any potential action. Further the accountant would be specifically prohibited from giving the sort of advice you seemed to wish for unless they were specifically engaged to do so.

there were also cases related to s660 I this period. If that had gone the other way would you be thinking they were negligent for giving advice to split?

[stek]

Hello

I am a contractor / limited company grossing £100,00+ with few expenses only, and was with a 'tax' accountant from 2005 until last year. It was only in 2011 that he advised of the tax advantages of issuing a share to my partner and splitting the dividends 50/50. I have worked out this would have saved about £5000pa in tax, ie I paid about £25000 too much over the years before. Is it possible to sue the accountant for negligence for not advising of a tax efficiency and, if so, what could be recovered? I understand that it may be limited by the 6 year rule and it may be the court don't tend to uphold claims against accountant who are not helping their clients avoid tax.
Please let me know if you have any thoughts.
Thank you

Jon

You can't income split with a 'partner' only a proper spouse, and no, u can't sue, you are responsible because you sign the accounts off, next please!

[ShandyDrinker]

Hello
Is it possible to sue the accountant for negligence for not advising of a tax efficiency and, if so, what could be recovered?

In reality the accountant can only advise you and it then depends on what basis you had engaged the accountant in the first place. If the accountant was paid to prepare your accounts, you can hardly get upset with the person for not advising you about how you should structure your company.

It may be the court don't tend to uphold claims against accountant who are not helping their clients avoid tax.

Precisely. My gut feeling is you'd be throwing time and money at pursuing a claim which has little basis. Others on here may disagree.

Ultimately as the company director it is up to you how to run you company and not your accountants. If this means your partner having a 50/50 share then so be it. However, you should read other threads on this site about this very thing and ensure you are aware of Section 660 (settlements legislation) and take advice accordingly. I'm sure other forum members will discuss pros and cons.

Before you do anything with shares I'd recommend taking advice from an accountant... oh wait

[jon2cuk]

Accountant didn't advice to split dividends

Hello

I am a contractor / limited company grossing £100,00+ with few expenses only, and was with a 'tax' accountant from 2005 until last year. It was only in 2011 that he advised of the tax advantages of issuing a share to my partner and splitting the dividends 50/50. I have worked out this would have saved about £5000pa in tax, ie I paid about £25000 too much over the years before. Is it possible to sue the accountant for negligence for not advising of a tax efficiency and, if so, what could be recovered? I understand that it may be limited by the 6 year rule and it may be the court don't tend to uphold claims against accountant who are not helping their clients avoid tax.
Please let me know if you have any thoughts.
Thank you

Jon

[Craig at Nixon Williams]

Firstly, I'm not sure why you would declare a dividend and then not pay it...personally I'd want the cash in my back pocket and it would avoid these complications!

An extension to the same question...if its declared and immediately credited to the shareholder's loan account, is it considered paid at that point or can the dividend still be revoked? I seem to remember crediting a dividend to a loan account is the same as physically paying it but I suppose you could revoke the dividend, undo the bookkeeping that put the money into the loan account and nobody would be any the wiser...

Once the dividend has been credited to the loan account, the money is put at the disposal of the directors and therefore is as good as a physical payment.

I would suggest that if you are using an online book-keeping software (I say this because we have recently launched one ourselves) then the point that a dividend is credited to the director's account will be the date that the software is updated by the customer. This is far more likely to be during the accounting period than customers where manual accounts are prepared after the end of an accounting period.

Good answer, thanks.

So we would fall under the first category, which implies a little extra control over personal taxation. For example, if there is a 50/50 split on shares and Director1 is well under the 40% threshold then he can take the dividend. Director2 has already crossed the 40% threshold this year so the company can declare his 50% shareholding dividend but not physically pay it until such time in the future when he has a lower tax burden.

Sounds a little odd though because the company can forever choose to delay payment of dividends until shareholders have little or no income in a FY....?

As TCP has put - CTM20095 states that with small companies, the date that the dividend becomes taxable is not necessarily the date that the physical payment takes place, but the date that the entry is made to the company’s accounting records – it therefore stands that if there is more than one shareholder, then the dividend will become taxable for both shareholders at the same point. It follows that the taxable date therefore cannot be manipulated between different shareholders in the way described.

[TheCyclingProgrammer]

Good answer, thanks.

So we would fall under the first category, which implies a little extra control over personal taxation. For example, if there is a 50/50 split on shares and Director1 is well under the 40% threshold then he can take the dividend. Director2 has already crossed the 40% threshold this year so the company can declare his 50% shareholding dividend but not physically pay it until such time in the future when he has a lower tax burden.

Sounds a little odd though because the company can forever choose to delay payment of dividends until shareholders have little or no income in a FY....?

This depends on the answer to my previous question, but I'm not sure its possible to declare a dividend and only pay one shareholder and not the other. If crediting a director's loan account means a dividend is considered to be "paid" then that's that. If you've physically paid one shareholder and credit the other shareholder's loan account then I don't see how you could revoke the dividend other than treating the physical payment made to the shareholder as a loan (and all the potential implications that entails).

What I don't think you can do is pay one shareholder but leave the other shareholders as "unpaid"; you have to physically pay them or credit a loan account.

This covers it in some detail:

http://www.hmrc.gov.uk/manuals/ctmanual/ctm20095.htm

Key points:

* Interim dividends can be rescinded at any time before they are "paid"
* "Paid" can include a credit to a shareholders loan account

OTOH, it also says that a dividend isn't considered paid until you actually make the bookkeeping entry that credits the dividend to your loan account and it goes on to say if you only do this once a year as part of an audit process, then the payment date is considered the date you do the bookkeeping entry even if thats a different accounting period to when the interim dividend was declared.

So perhaps you can do what you're suggesting. It does seem odd that a single dividend declaration could be taxable for two different shareholders at different times though.

[TheCyclingProgrammer]

Good question!

If the dividend is declared by the directors (an interim dividend), the dividend can be revoked at any time until it is paid and therefore the date that it becomes taxable is the date that is is physically paid.

An extension to the same question...if its declared and immediately credited to the shareholder's loan account, is it considered paid at that point or can the dividend still be revoked? I seem to remember crediting a dividend to a loan account is the same as physically paying it but I suppose you could revoke the dividend, undo the bookkeeping that put the money into the loan account and nobody would be any the wiser...

[ChimpMaster]

Good question!

If the dividend is declared by the directors (an interim dividend), the dividend can be revoked at any time until it is paid and therefore the date that it becomes taxable is the date that is is physically paid.

If the dividend is voted by the shareholders (a final dividend, voted at AGM) then it creates an immediate debt to the company and the date that it becomes taxable is then the date that it is voted.

Hope this helps!
Craig

Good answer, thanks.

So we would fall under the first category, which implies a little extra control over personal taxation. For example, if there is a 50/50 split on shares and Director1 is well under the 40% threshold then he can take the dividend. Director2 has already crossed the 40% threshold this year so the company can declare his 50% shareholding dividend but not physically pay it until such time in the future when he has a lower tax burden.

Sounds a little odd though because the company can forever choose to delay payment of dividends until shareholders have little or no income in a FY....?

[Craig at Nixon Williams]

So if the distribution is declared by the company but not physically paid, is it still accountable for personal taxation at this time, or only when physically received by the shareholder?

Good question!

If the dividend is declared by the directors (an interim dividend), the dividend can be revoked at any time until it is paid and therefore the date that it becomes taxable is the date that is is physically paid.

If the dividend is voted by the shareholders (a final dividend, voted at AGM) then it creates an immediate debt to the company and the date that it becomes taxable is then the date that it is voted.

Hope this helps!
Craig

[ChimpMaster]

I am unsure why an accountant would suggest this, as ultimately you should each receive payments in accordance with your respective shareholdings. If there is talk of waivers, or different classes of shares being issued then my advice would be to run a mile.

As malvolio has said, the dividends don’t necessarily need to be paid at the same time, but they should become a liability of the company at the same time so it doesn’t really make sense not to pay them together.

Craig

So if the distribution is declared by the company but not physically paid, is it still accountable for personal taxation at this time, or only when physically received by the shareholder?

[Craig at Nixon Williams]

I am unsure why an accountant would suggest this, as ultimately you should each receive payments in accordance with your respective shareholdings. If there is talk of waivers, or different classes of shares being issued then my advice would be to run a mile.

As malvolio has said, the dividends don’t necessarily need to be paid at the same time, but they should become a liability of the company at the same time so it doesn’t really make sense not to pay them together.

Craig

[TheCyclingProgrammer]

I hope he didn't mention waivers as a possible option going forward.

There's nothing wrong with waivers per se. They can be considered a settlement but remember that's only going to be an issue of it's being done to avoid tax, i.e. the waiving shareholder is a higher rate tax payer is waiving their dividend so they can keep paying dividends to a lower rate payer.

In OPs case their wife would be waiving their dividend so presumably no tax advantage gained. But it's important that OPs accountant ensures the waiver paperwork is done correctly.

Like mal I don't understand why you would make a spouse a shareholder only for then to waive their right to dividends otherwise what's the point?

OP should of course run a mile of the accountant starts recommending waivers in the other direction once they reach the higher rate tax threshold.

TLDR; OPs wife could quite legally waiver her dividends but doing so would be pretty pointless and defeat the object of splitting your shareholding with your spouse.

[TheFaQQer]

I hope he didn't mention waivers as a possible option going forward.

That's the only way you're going to get round not paying the dividend to all the shareholders, assuming the shares are of the same class of course.

[northernladuk]

I hope he didn't mention waivers as a possible option going forward.

[malvolio]

Hi,

I share the dividend income of my ltd company between me and my spouse on a 70/30 ratio.
before making the first payment of dividend I discussed with my accountant for the confirmation of amounts and he told me that I don't have to pay the dividend to my spouse at this time. Just keep paying the 70% to myself until I reach the low tax threshold and then I can start paying the dividend to my spouse.
This does not look right to me as I believe that dividend has to be distributed to all shareholders at the same time.
Can anyone shed some light on this?

Regards
J

Distributed but not necessarily paid. However I can see no reason not to pay them at the same time since you and your spouse have separate tax liabilities and one does not affect the other. You may as well take all the money out until you hit the boundary then stop taking divis for the rest of the year; dumb idea in many ways but if all you want to do is not pay higher rat then there's a hard stop to your income anyway. If the objective is to get money out of the company, then there are better options, such as a pension fund, which take lumps out of your CT liability as well

Also, of course, his approach it guarantees you get a big drop in net income during the year for no reason at all...

Perhaps a better accountant is an option? Try and find one that thinks for a living...