Reply to: Interim Dividends v Director Withdrawals

[JRCT]

Maybe the company doesn't have sufficient funds/warchest. Starting as new company, it would take some time to get to the point you can do that depending on your rate and bench time.

This. I don't have enough to be able to do that at the moment. That said, I think that next year, all being well, I should be able do it in two tranches.

[d000hg]

Why bugger about with monthly dividends of 3k each? Why not divided yourself the full years allowance in April and stick it in a high interest account?

Maybe the company doesn't have sufficient funds/warchest. Starting as new company, it would take some time to get to the point you can do that depending on your rate and bench time.

[eek]

Why bugger about with monthly dividends of 3k each? Why not divided yourself the full years allowance in April and stick it in a high interest account?

He may be like me where I can legitimately pull more money from the company than it could earn in a year ( £10k salary, 2x£27k in dividends, rest upto £50k to pension and there is another £100k from prior years to take).

[northernladuk]

Assuming, for the purposes of this question, that you always stay within respective limits and thresholds and that your ltd is always in a healthy position to pay all dividends and taxes accordingly:

Do you specifically, and purposely, match up interim dividends with the actual director withdrawals that you make?

Let's say you declare a dividend of £3k each month. Do you take a corresponding withdrawal of exactly £3k, or does it end up getting aggregated with other payment activity (you pay expenses personally, you're paid a portion of salary etc) which means your actual director withdrawals might be £1k one week, then £500, then another £2k etc, etc.


I'm not worried about breaching tax thresholds or my £10k directors loan limit or anything like that - the online accounting software ensures that's not going to happen. It's more about accounting practise.

Why bugger about with monthly dividends of 3k each? Why not divided yourself the full years allowance in April and stick it in a high interest account?

[jamesbrown]

More FUD.

Whatever. Do as you see fit.

[JRCT]

I think the pertinent question is this: given the simplicity of making separate payments and the secondary benefit that it makes your bank transactions simpler to follow and aggregate, why would you not do this? I agree with Forbes Young. Why give HMRC a reason to dig deeper, even if everything is strictly legal? Also, I think it's good to mentally separate these two things in your head. A dividend payment is a reward for profitability, it is not a salary in any sense. You can call this pedantic, but I think it's important. In my view, if you start to adopt a questionable practice/mindset in some areas, it will creep into other areas too. As I said, YMMV, and it's not something I'd lose sleep over.

For me, the reason for not doing this is that I use an online accountant service. I record everything in and out on there and I trust the software to tell me what I can and can't take as a dividend at any given time. Regardless of what I've actually withdrawn (to a degree).

For the same reasons, I trust the software to be able to unravel any complications fairly easily if I have a need to look back or if HMRC did come knocking.

Part of being a contractor is the freedom and lifestyle and part of that, surely, is being able to take the money as and when (allowing for the obvious, of course) and not alloting it to a strict "salary today, dividend tomorrow" regime.

[TheCyclingProgrammer]

I think the pertinent question is this: given the simplicity of making separate payments and the secondary benefit that it makes your bank transactions simpler to follow and aggregate, why would you not do this?

Because so long as everything is legal and above board, I don't see why people should let HMRC effectively dictate how they micro-manage aspects of their business and if a company wants to make one single payment to settle any outstanding liabilities to an employee and/or shareholder then that is up to them.

Why give HMRC a reason to dig deeper, even if everything is strictly legal?

I'm not really convinced that a single bank payment would give HMRC reason to dig deeper into anything unless they already had plenty of other things to be concerned about. You show them your books, the reconciled bank statement, the payslip and dividend paperwork if they ask and that's it. If they are checking that payroll has been operated correctly and/or that dividends were correctly declared, I'd expect them to want to see this regardless of how many bank payments you made.

Also, I think it's good to mentally separate these two things in your head. A dividend payment is a reward for profitability, it is not a salary in any sense. You can call this pedantic, but I think it's important.

I agree, you should think of them as separate things, from a business perspective. I don't think how you choose to transfer the money owed has any bearing on this at all. Once its in your own bank account, they are both just "income".

In my view, if you start to adopt a questionable practice/mindset in some areas, it will creep into other areas too.

More FUD.

[jamesbrown]

But how can legal dividends with the right paperwork be in anyway construed as salary, just because its paid at the same time as the salary (which has its own separate documentation)? Just because "HMRC says so"? They say a lot of things...

Still seems like scaremongering to me. Have HMRC ever successfully argued that a dividend payment was actually a salary, where both payroll and appropriate dividend paperwork were in place?

I think the pertinent question is this: given the simplicity of making separate payments and the secondary benefit that it makes your bank transactions simpler to follow and aggregate, why would you not do this? I agree with Forbes Young. Why give HMRC a reason to dig deeper, even if everything is strictly legal? Also, I think it's good to mentally separate these two things in your head. A dividend payment is a reward for profitability, it is not a salary in any sense. You can call this pedantic, but I think it's important. In my view, if you start to adopt a questionable practice/mindset in some areas, it will creep into other areas too. As I said, YMMV, and it's not something I'd lose sleep over.

[TheCyclingProgrammer]

<pedant>The paperwork needs to be appropriate and the dividend needs to be legal . Buck v HMRC and Donovan & McLaren v HMRC both had the appropriate paperwork but the dividend wasn't</pedant>

Well quite, that is what I meant. A legal dividend with sufficient profits and the correct paperwork. Salary paid, RTI submission filed and payslip produced. So everything as it should be.

I'm not sure how those settlements legislation cases are particularly relevant; they are certainly an exceptional cases concerning the use of dividend waivers but in neither were the dividends actually found to considered as *salary* payments, rather that the waivers were treated as a settlement.

Has there ever been a case of a straightforward, single shareholder company with sufficient profits and all other paperwork and requirements for a legal dividend in place to have been found that their dividend payments were actually salary payments?

[TheFaQQer]

Still seems like scaremongering to me. Have HMRC ever successfully argued that a dividend payment was actually a salary, where both payroll and appropriate dividend paperwork were in place?

<pedant>The paperwork needs to be appropriate and the dividend needs to be legal . Buck v HMRC and Donovan & McLaren v HMRC both had the appropriate paperwork but the dividend wasn't</pedant>

[TheCyclingProgrammer]

It does matter to HMRC - they hate to see dividends and salary mixed up - its like a red rag to a bull. Bear in mind that dividends are returns on investment (ie on the shares you hold in the company); they are not glorified salary/employment income.

But how can legal dividends with the right paperwork be in anyway construed as salary, just because its paid at the same time as the salary (which has its own separate documentation)? Just because "HMRC says so"? They say a lot of things...

Still seems like scaremongering to me. Have HMRC ever successfully argued that a dividend payment was actually a salary, where both payroll and appropriate dividend paperwork were in place?

[Forbes Young]

So long as it all tallies up it shouldn't matter, but I split it up to keep things simpler from an accounting point of view.

Makes it easier for me to check things, and presumably for my accountant as well.

It does matter to HMRC - they hate to see dividends and salary mixed up - its like a red rag to a bull. Bear in mind that dividends are returns on investment (ie on the shares you hold in the company); they are not glorified salary/employment income.

[TheFaQQer]

I always keep them separate.

I have three payments set up from the bank account - salary, expenses, dividend for each employee and shareholder. Salary is on a standing order, expenses are done ad-hoc once I've processed a month, and dividend is used whenever I take a dividend. If that results in three separate payments on the same day, then so be it - I like to see exactly what is what.

(Actually, I have a fourth payment type of directors loan just in case)

For me, it doesn't really make much difference - I take a dividend round about April 10th, and another one round about March 31st to take any remaining up to the next threshold. Then the money sits in my 123 account earning me 3% interest for the year, or it gets invested somewhere else. Monthly dividends just seems like a pain in the bum to me.

[TheCyclingProgrammer]

In my view, it's just "common sense" to keep them separate. If HMRC want to make the case that dividends are being paid as disguised salary, it's going to make their job easier if you apparently view dividends as salary.

This sounds like FUD to me. If dividend is legal then as far as I'm aware there's no precedent for HMRC being able to claim it is actually a salary. Is there one? A dividend is a dividend. If there is sufficient profit and the paperwork is correct, I don't see how making one unified payment can change that, no matter what HMRC might like to think.

However, for something that is simple to implement and also makes it simpler to look back through your bank transactions and understand and aggregate the various classes of debits, keeping the payments separate is just good practice in my mind. YMMV.

I buy the argument that keeping payments separate might make it easier to reconcile bank statements with your books, but on the other hand in an age of computerised book-keeping and software like FreeAgent and Xero I'm not sure it actually makes that much difference. For instance, I could import a bank statement into FreeAgent and easily split a transaction to show it as £x salary and £y expenses. If HMRC were to audit my accounts, they'd be looking at my books and see clearly what each payment was.

Equally, I could just credit the salary and dividends directly to my DLA if I wanted to. This would be enough for the dividend to be deemed as paid. I could then make whatever payments I wanted to from my DLA - payments that might not match up with the original salary or dividend payments whatsoever. So long as these payments are clearly shown in your books as payments from the DLA it should all tally up just fine.

[TheCyclingProgrammer]

So long as it all tallies up it shouldn't matter, but I split it up to keep things simpler from an accounting point of view.

I also keep dividend and salary payments separate too, but like you said the actual payment should make no difference as long as PAYE and dividend paperwork is correct. I'm just curious where this idea that the two should be paid separately comes from.

My own personal schedule is:

* Salary - paid monthly
* Dividends - paid quarterly
* Expenses - ad-hoc. Expenses are recorded in detail in a spreadsheet and entered into FreeAgent in batches (e.g. July travel expenses) and I make payments whenever I get round to it (FreeAgent keeps a running total of what I'm owed).

I'm not entirely happy with my expenses system as I always get behind on scanning and recording my receipts but it just about works.