Reply to: Paperwork required to split dividends with wife

[mickael28]

So you issue yourself with 99 new shares, your share capital increases from £1 to £100, and (usually) your Debtors increases from £1 to £100 to keep the balance sheet balanced (meaning you haven't paid for the shares, and this is money you owe to your company). If you paid nothing into the company bank account when you set it up, you could deposit £100 from your personal bank account....this will reduce Debtors by £100, and increase Cash at Bank by £100....so your balance sheet stays balanced. Make sense?

Thanks Greg, that's the way I was thinking for not owing anything to the company; but now that you mention that my Debtors (learning about this now) has currently increased from £1 to £100, what could happen if I didn't pay anything back?

Asking because my accountant didn't mention anything about me and my wife paying anything from our personal account to the bank account to settle this (although that's what I'll do anyway), so just wondering.

[Greg@CapitalCity]

And if we need to increase the number of shares as well, do we need to pay for them from our personal bank account or that's not required? I've not been asked to pay anything even though the number of shares have increased and the price per share has been kept the same, so wondering where they're coming from...

Notwithstanding the debate on this thread regarding share splitting....your company can issue you new shares - this is where the shares come from. If you have 1 share at the moment, maybe make it 100 now. So you issue yourself with 99 new shares, your share capital increases from £1 to £100, and (usually) your Debtors increases from £1 to £100 to keep the balance sheet balanced (meaning you haven't paid for the shares, and this is money you owe to your company). If you paid nothing into the company bank account when you set it up, you could deposit £100 from your personal bank account....this will reduce Debtors by £100, and increase Cash at Bank by £100....so your balance sheet stays balanced. Make sense?

[northernladuk]

I can't bloody find the quote from Simon on splits I mentioned so hope to god I haven't misquoted him but here are two very good comments from him regarding the choice being yours and you being aware of the risks....

http://forums.contractoruk.com/accou...ml#post1537133

http://forums.contractoruk.com/accou...ml#post1083073

[mickael28]

Thanks for the reply - very interesting. I think the quote above says it all - why oh why HMRC can't just issue a set of simple rules about what you can and can't do is beyond me. Maybe I have an over-simplistic view of things, but either something is ok or it isn't. And if, with all HMRC's resources and "expertise", the general public still have to resort to trying to figure it out themselves in forums, I think that says a lot about the system! I'm not saying it's a 5 minute job for them, but if they can't work it out, who do they think can?

I personally think that HMRC officials are not willing to make subjects such as this clear because they have a similar set up themselves in one way or another and it'd go against their own interests. Better leave it in the grey area but try to persuade the rest to do the opposite to what you're doing...

[northernladuk]

Hhmm... so I'm not sure how that policy is passed down onto his employees as my accountant is from SJD.

As you say, this is a very grey area where we can always see totally opposite opinions even between professionals, so who's right and who's wrong is hard to tell; the only thing we can do is try to do the things we do the correct way. I'll ask her about how those shares were created and if we need to personally pay for them when she's back as that's the part that's not clear for me yet...

Oddly enough so am I and I got the same advice as you when I was enquired at the beginning. I can only assume he employs professionals with their own opinions and lets them do their stuff rather than imposing opinions company wide. I guess they know better but when it is my livelyhood at stake I will only go with what I feel comfortable with.

Make sure you log all your questions and get her to explain it from scratch so you get a full understanding of it once and for all. You are responsible not your accountant so let them do their stuff but understand it as best you can.

[mickael28]

Simon of SJD himself has pointed out he doesn't support a 50/50 split and with a 70/40 or 60/40 split reflecting the relationship would be much safer.

Hhmm... so I'm not sure how that policy is passed down onto his employees as my accountant is from SJD.

As you say, this is a very grey area where we can always see totally opposite opinions even between professionals, so who's right and who's wrong is hard to tell; the only thing we can do is try to do the things we do the correct way. I'll ask her about how those shares were created and if we need to personally pay for them when she's back as that's the part that's not clear for me yet...

[meanttobeworking]

... it is a public forum discussing a grey area ...

Thanks for the reply - very interesting. I think the quote above says it all - why oh why HMRC can't just issue a set of simple rules about what you can and can't do is beyond me. Maybe I have an over-simplistic view of things, but either something is ok or it isn't. And if, with all HMRC's resources and "expertise", the general public still have to resort to trying to figure it out themselves in forums, I think that says a lot about the system! I'm not saying it's a 5 minute job for them, but if they can't work it out, who do they think can?

[northernladuk]

@NLUK: I've noticed on a number of threads that you advise caution on splitting share ownership with a spouse. I ask this question respectfully (rather than looking for an argument), but most other opinions seem to be that having a 50/50 split with a spouse, particularly if done at company incorporation, is a legitimate way of a married couple making the most of their tax allowances given the unique legal relationship between two married people. This appears to be backed up by the courts. This in itself surprises me, as it does seem to be bending the rules somewhat. However given the above, I just wonder why you still consider it risky?

To re-iterate, I'm not trying to put you on the spot or throw rocks, I'm genuinely interested in your viewpoint.

It's a good question and I was going to clarrify my standpoint to the OP anyway after being a bit harsh to him. I personally don't like this set up, particularly because everyone that comes on asking this normally includes the words something along the lines of 'I want to reduce the tax I pay so want to pay wife'. How can you not think that this is an artificial setup to avoid tax which is totally againt the wording of the legislations HMRC have been trying to push through. There is a comment on the S660 guides here that says the following...

In December 2007, the government published draft legislation "focused specifically on income shifting arrangements that make use of companies or partnerships to gain a tax advantage."

Draft legislation stated the new rules would not apply if there was a "genuine commercial arrangement" and HMRC believes tax reduction was "not the main or one of the main purposes" of the arrangement.

Otherwise the rules, which are under consultation at the time of writing, will apply where one person 'shifts' trade or business income to another, with the effect being that less income tax is paid.

Now I don't know if the legistlation went through and so on but still the bold section is pretty fundamental and difficult to argue. The people that come on here generally fail this in their own wording so I think this is a very risky area to get into, particularly with the lack of knowledge of the people asking as proven in this thread.

I think the accountants that push 50/50 splits without warning their clients of the risks are taking a very gung ho approach. I have no problems people rewarding their partners for supporting them but I don't think a 50/50 split is the way forward. Just for note as well not all accountants on this board advocate 50/50 split. Some have said just don't do it at all, for avoidance and splitting with your wife issues. Simon of SJD himself has pointed out he doesn't support a 50/50 split and with a 70/40 or 60/40 split reflecting the relationship would be much safer. That advice I can take, just split it 50/50 and forget about it I can't.

Like anything we seem to do there is always HMRC looming and the more we do it, the more HMRC will focus on it. Don't get me wrong, I know the risk of getting investigated is negligible and we haven't had anyone on here caught yet but I don't think that is reason enough for me not to play devils advocate on this one.

It's just my opinion and as I can't help but post alot on here it seems like I am dead against it, guess I just like to put my nose in to add my thoughts, maybe wrongly but it is a public forum discussing a grey area. I would hope people consider my thoughts but do what they want to based on professional advice.

I have bolded a comment about incorporation in your post which I probably wouldn't argue too much. It's just when people come on looking to reduce their tax a number of years in.

[meanttobeworking]

@NLUK: I've noticed on a number of threads that you advise caution on splitting share ownership with a spouse. I ask this question respectfully (rather than looking for an argument), but most other opinions seem to be that having a 50/50 split with a spouse, particularly if done at company incorporation, is a legitimate way of a married couple making the most of their tax allowances given the unique legal relationship between two married people. This appears to be backed up by the courts. This in itself surprises me, as it does seem to be bending the rules somewhat. However given the above, I just wonder why you still consider it risky?

To re-iterate, I'm not trying to put you on the spot or throw rocks, I'm genuinely interested in your viewpoint.

[mickael28]

As NLUK says, you need to be a bit careful when juggling shares around like this.

I've always been led to believe that constantly changing the share allocation is seen as a bit dodgy by HMRC. I.e. if it looks like you've changed the share allocation to avoid tax pure and simple.

Well, this is the 1st time in 7 years that I've changed anything (it's not like this is happening every few months) and this situation surely is going to happen for most of the contractors out there sooner or later, which make me wonder why my 1st accountant just issue a single share in the 1st place.

If we go to the professionals they should think about possible future implications when providing their services, and in this case the fact that you end up paying less taxes that way should be even irrelevant, ie, how could you sell/gift some shares in your company (to your wife or otherwise) if there's a single share in there? My view is that the original set-up was flaw from the very beginning (without me knowing it) so this is what we had to do to sort that error out.

Although my current doubt still is if those new shares can be created by the company just like that or if we need to pay for them from our personal bank accounts.

[psychocandy]

As NLUK says, you need to be a bit careful when juggling shares around like this.

I've always been led to believe that constantly changing the share allocation is seen as a bit dodgy by HMRC. I.e. if it looks like you've changed the share allocation to avoid tax pure and simple.

[mickael28]

You really need to think carefully before going through with this. Hmrc are happy with it where there is a business justification and tax avoidance isn't the sole purpose. How on earth can there be a business justification when you understand so little? They will have your trousers round your ankles bent over the desk faster than you can say 'my accountant said it was ok'

Fair point there, but that's why I am trying to understand how things should be properly done.

Difficult to know what's correct if the accountant, who's supposed to guide you in the right direction, think everything's fine when maybe it isn't.

When I asked her about about the subject of splitting that single share, she didn't see a problem at all about increasing the number and then splitting the result, saying that everything in that sense was fine and no need to worry about anything. Confused more now

[northernladuk]

You really need to think carefully before going through with this. Hmrc are happy with it where there is a business justification and tax avoidance isn't the sole purpose. How on earth can there be a business justification when you understand so little? They will have your trousers round your ankles bent over the desk faster than you can say 'my accountant said it was ok'

[mickael28]

What do you mean the price per share has not changed? Why would you think you have to pay for them from your personal account as well? You are creating the share by making each one worth less of your company. If you currently have 1 you will be creating 10 that are worth a tenth of the company surely. You can set the price of the shares to anything you want within reason. It's all just a paperwork exercise seems it is just an avoidance exercise.

If you are looking at embarking on a strategy that some would argue is risky wouldn't it have been a good idea to research these questions first? You are ultimately responsible for your actions not your accountant.

I think we are doing the correct thing but I'm not sure how the new shares are created.

My first accountant just created a single share of £1 in the company, so now that I needed to split it up the new accountant suggested to increase them to £100 (keeping the same price of £1 per share) and as a result somehow she's now created 99 new shares of £1 of which I own 50 and my wife owns 50 as well, but we have not paid anything for those shares so I was thinking along the lines of that maybe the company can do whatever (and create new shares just like that) but at the same time I suppose that people who want some new shares should pay for them?

Or can the company just give 'free' shares just like that?

[northernladuk]

And if we need to increase the number of shares as well, do we need to pay for them from our personal bank account or that's not required? I've not been asked to pay anything even though the number of shares have increased and the price per share has been kept the same, so wondering where they're coming from...

(Accountant on holidays for a little while, so I cannot clarify with her at the moment)

What do you mean the price per share has not changed? Why would you think you have to pay for them from your personal account as well? You are creating the share by making each one worth less of your company. If you currently have 1 you will be creating 10 that are worth a tenth of the company surely. You can set the price of the shares to anything you want within reason. It's all just a paperwork exercise seems it is just an avoidance exercise.

If you are looking at embarking on a strategy that some would argue is risky wouldn't it have been a good idea to research these questions first? You are ultimately responsible for your actions not your accountant.