Reply to: Splitting Dividends across Tax Years

[northernladuk]

I thought FreeAgent was his new thing ?

That's only a dumb tool.........

[radish2008]

NLUK won't reply because you've already asked your accountant. Sorry.

I thought FreeAgent was his new thing ?

[craigy1874]

I think they'll be fudging it to minimise tax owed, and they'll say you "declared" the dividends in the previous tax year but didn't distribute them until afterwards

Lots of accountants do this, it's part of their job to help you be tax efficient

It's our job to help our clients be tax efficient.

However, what you suggest is just fraud!

[EinsteinTax]

so I was right first time :O

jamesbrown is technically correct. The potential issue is when the dividend is "unconditionally available to the recipient". Interim dividends do not necessarily create an enforeable debt as they could potentially be varied prior to payment:

107. An interim dividend can be varied and rescinded at any time before payment and can therefore only be regarded as "due and payable" when the date for payment arrives.

108. The main case law authority is Potel v CIR (1970), 46 TC 658 HC which indicates that the declaration of a dividend by a company and its payment are two separate matters.

109. So a dividend is paid for income tax purposes on the date on which payment may be enforced.

Source: House of Commons - Explanatory Note

With appropriate resolutions and book entries it's possible to treat a dividend paid in one year as income for the previous year, but there is potential for it to be challenged so best avoided if possible.

[pr1]

Completely false. It's when the dividend is declared to be paid. In other words, when it becomes unconditionally available to the recipient. The payment date is irrelevant. Frankly, it's ridiculous that some contractors don't know this.

so I was right first time :O

[SueEllen]

Any possibly more worrying that a lot of accountants don't know this?

I had to sent the trainee doing my accounts two years ago links. I was tempted to email the accountant to but thought I would teach her a few things instead.

BTW I have a few shares from blue chips not in an ISA or pension, so I have always been aware of this simply because I've had to get cheques reissued in the past.

[EinsteinTax]

Completely false. It's when the dividend is declared to be paid. In other words, when it becomes unconditionally available to the recipient. The payment date is irrelevant. Frankly, it's ridiculous that some contractors don't know this.

In the case of interim dividends HMRC may argue that it is the date of payment that is relevant, especially in the OP case where there don't appear to have been appropriate resolutions etc made at the time.

[jamesbrown]

Any possibly more worrying that a lot of accountants don't know this?

Yes, very good point. I didn't notice the handle. EinsteinTax, no less

[ContrataxLtd]

Completely false. It's when the dividend is declared to be paid. In other words, when it becomes unconditionally available to the recipient. The payment date is irrelevant. Frankly, it's ridiculous that some contractors don't know this.

Any possibly more worrying that a lot of accountants don't know this?

[jamesbrown]

It is the date on which the dividend is paid that determines the tax point, not when it is declared. If a dividend is declared on 1st April 2016, but not paid until 10th April 2016, it will be treated as 16/17 income.

Completely false. It's when the dividend is declared to be paid. In other words, when it becomes unconditionally available to the recipient. The payment date is irrelevant. Frankly, it's ridiculous that some contractors don't know this.

[pr1]

Director Loans need to be handled with care as they can attract additional tax charges if they exceed £10k or are not repaid before 9 months after year end.

It's probably easiest to illustrate with an example. Let's assume you have taken salary and dividends that have used you basic rate tax band (circa £43k for 16/17). It's the end of March 2017 and you have a £5k personal credit card bill to pay.

If you take £5k as dividends this will push you into the next tax band and you will need to pay 32.5% higher rate dividend tax (£1,625).

However, instead of taking £5k dividends at the end of March you could take a £5k director loan. On the 6th April 2017 you would have a fresh basic rate dividend allowance, so you could take a £5k dividend and use that to repay your £5k director loan. This would avoid the £1,625 higher rate dividend tax.

This can only be used for short term cash flow issues, but can be a useful option if you are short on personal funds towards the end of the tax year.

OK yeah that's essentially as I thought in money terms - i.e. that payment you made in march 2016 that you thought was a dividend, come january 2017 might have actually been a directors loan - so if the dividend paperwork was created at the time of the 'dividend' being paid (which of course we all do ) - then you are essentially either ripping that up or changing the date on it

[EinsteinTax]

Interesting! That's not what I'd interpreted (second hand, to be fair) from a friend... so if you can do it with carefully declared directors loans what happens to the tax for the previous year (presumably directors loans aren't taxable?)

Director Loans need to be handled with care as they can attract additional tax charges if they exceed £10k or are not repaid before 9 months after year end.

It's probably easiest to illustrate with an example. Let's assume you have taken salary and dividends that have used you basic rate tax band (circa £43k for 16/17). It's the end of March 2017 and you have a £5k personal credit card bill to pay.

If you take £5k as dividends this will push you into the next tax band and you will need to pay 32.5% higher rate dividend tax (£1,625).

However, instead of taking £5k dividends at the end of March you could take a £5k director loan. On the 6th April 2017 you would have a fresh basic rate dividend allowance, so you could take a £5k dividend and use that to repay your £5k director loan. This would avoid the £1,625 higher rate dividend tax.

This can only be used for short term cash flow issues, but can be a useful option if you are short on personal funds towards the end of the tax year.

[pr1]

It is the date on which the dividend is paid that determines the tax point, not when it is declared. If a dividend is declared on 1st April 2016, but not paid until 10th April 2016, it will be treated as 16/17 income.

Interesting! That's not what I'd interpreted (second hand, to be fair) from a friend... so if you can do it with carefully declared directors loans what happens to the tax for the previous year (presumably directors loans aren't taxable?)

[EinsteinTax]

I think they'll be fudging it to minimise tax owed, and they'll say you "declared" the dividends in the previous tax year but didn't distribute them until afterwards

Lots of accountants do this, it's part of their job to help you be tax efficient

It is the date on which the dividend is paid that determines the tax point, not when it is declared. If a dividend is declared on 1st April 2016, but not paid until 10th April 2016, it will be treated as 16/17 income.

[EinsteinTax]

Hi,

After my first year of contracting I had an e-mail from my accountants with my personal tax return ready for submission, which had been completed based on company accounts that I submitted to them.

One thing I noticed was that they had split dividends from the company year (June - June) across separate tax years, regardless of which tax year the dividend was actually taken in. I questioned this as I assumed that the tax year for the dividend should be based on the date the dividend was paid. They claimed it was a legitimate practise and would be tax advantageous.

This is a relatively large accountancy who specialise in contractors. Should I be concerned? Is this a legitimate practise?

Thanks,
TK

Strictly speaking, if the dividend payments were declared and paid your accountant should not be retrospectively changing this to minimise your tax liability. However, it is not uncommon for accountants to treat all payment made from your business account to your personal account as a kind of "slush fund" and then at year end allocate the payments as either dividend payments or director loans to minimise your tax liabilities.

It's always best to agree your dividend strategy in advance with your accountant. This way you know exactly how each payment will be allocated (dividend or loan) when it is made and you have the best chance of operating as tax efficiently as possible without the need for retrospective classification.