Reply to: Optimal Split for Spouse shareholding

[Jessica@WhiteFieldTax]

Forgetting waivers for a minute.

Does anyone have proof that a change in shareholding percentages (year to year or whenver) matter to HMRC? or as implied is a red flag to HMRC?

I can't see how it matters. Shareholders change their holdings all the time.

HMRC would have had to start some sort of investigation already to even notice.

IMV it's not so much whether its a red flag, as whether you can explain it if HMRC did query it. It's a step too far for me, but that's just my comfort zone.

[northernladuk]

then there will remain a difference in opinion regarding what the HMRC thinks is 'acceptable', and what a small business thinks is 'acceptable'.

Which will always be in question when HMRC don't consider us small businesses.....

[prozak]

Forgetting waivers for a minute.

Does anyone have proof that a change in shareholding percentages (year to year or whenver) matter to HMRC? or as implied is a red flag to HMRC?

I can't see how it matters. Shareholders change their holdings all the time.

HMRC would have had to start some sort of investigation already to even notice.

[Jessica@WhiteFieldTax]

although it sounds odd, contractors accountants are just people too

Allededgly. I'm sure some of my clients think I have a heart of stone though

Seriously, good points Greg

[Greg@CapitalCity]

In the context of a husband and wife who are the only shareholders in a close company, is having A and B class shares just as bad as dividend waivers in the eyes of HMRC or is this somehow more acceptable.

The thing that I find difficult is that most of this is a grey area and we keep hearing that HMRC "don't like" certain trading structures. It's often difficult to know what's actually acceptable and what's not.... There is always a suspicion that people like MPs and big businesses with hot shot accountants are free to exploit the system in this way and HMRC would shy away from clamping down on them whereas the pleb on the street might not be treated so leniently.

I think it really depends on the person from the HMRC doing the inspection. The use of dividend waivers, and A/B shares, when used to split income between spouses may attract the attention of the HMRC, but so long as these are done correctly then it makes it difficult for the HMRC to attack. The main issue here is the HMRC have never successfully won a case in this area (where these arrangements have been done correctly) and your average contractor accountant does not want to be person the HMRC decides to have a crack at. Everyone has different perceptions of risk and although it sounds odd, contractors accountants are just people too with their own perceptions of risk. Its clear that when either of these arrangements are done for balancing income between spouses that the HMRC don't like it. Its also clear that when done correctly, the HMRC to date have not won support for their position. To be fair I think unless there is a legislation change, or unless the government approach to taxing families changes (in a number of countries income splitting is the default tax treatment), then there will remain a difference in opinion regarding what the HMRC thinks is 'acceptable', and what a small business thinks is 'acceptable'.

[lithium147]

However where problems can arise, and HMRC will take the settlement issue, is if the level of dividend and waiver is such that the full dividend, if it hasn't been waived, exceeded retained profits.

Can't one waive a dividend that doesn't exceed retained profits. Then later on, post a dividend (that is not waived) for the remaining profits? Thereby achieving the same result..

If there are numerous H&W companies using dividend waivers, its only a matter of time before we see a court case arise on this a matter. At which time, we will finally have some practical guidance on what is appropriate.

[Jessica@WhiteFieldTax]

As captainham says, avoiding putting one of the shareholders earnings into the higher rate tax bracket is not such a good reason. Mitigating circumstances may be present if the money was retained in the company to fund future expansion of the company.

Something Jessica@WhiteFieldTax might be able to offer an opinion on for us:

In the context of a husband and wife who are the only shareholders in a close company, is having A and B class shares just as bad as dividend waivers in the eyes of HMRC or is this somehow more acceptable.

The thing that I find difficult is that most of this is a grey area and we keep hearing that HMRC "don't like" certain trading structures. It's often difficult to know what's actually acceptable and what's not.... There is always a suspicion that people like MPs and big businesses with hot shot accountants are free to exploit the system in this way and HMRC would shy away from clamping down on them whereas the pleb on the street might not be treated so leniently.

A / B split for H&W? Personally I would be uneasy about that unless there was a commerical reason, eg regulated business and need to control voting. Otherwise it feels slightly too pushy for me.

That said, it's personal opinion only, and in the right circumstances - sorry that phrase again - I would give it as a option to a client, albeit with a health warning. Young v pearce failed on "right to income" from preference shares, so ordinary As and Bs are perceived safe: my unease comes from the scenario beign too close to Arctic Systems, despite that being lost and not legislated.

Re Dividend Waivers, I've never known either from cases I've been involved with nor from wider professional reading, a point coming up on justifying a dividend waiver. In fact it would seem to me there is inherently no justification for them, it's an apparently gratious act by the shareholder, and as there is no consideration it may well benefit from being under deed (in practice letter suffices).

However where problems can arise, and HMRC will take the settlement issue, is if the level of dividend and waiver is such that the full dividend, if it hasn't been waived, exceeded retained profits.

A lot of this comes down to comfort levels: different accountants and clients have differing comfort levels, however that shouldn't stop the possibilities being discussed, even if they are discounted by client or caveatted by advisor.

[northernladuk]

As captainham says, avoiding putting one of the shareholders earnings into the higher rate tax bracket is not such a good reason. Mitigating circumstances may be present if the money was retained in the company to fund future expansion of the company.

But not in the majority of PSC cases so there isn't really a good reason for us.

In the context of a husband and wife who are the only shareholders in a close company, is having A and B class shares just as bad as dividend waivers in the eyes of HMRC or is this somehow more acceptable.

Just as unacceptable.Using class B you can give any amount of money per divi so keeping yourself 1p under the tax so again using it as a flexible way to avoid tax.

The thing that I find difficult is that most of this is a grey area and we keep hearing that HMRC "don't like" certain trading structures. It's often difficult to know what's actually acceptable and what's not.... There is always a suspicion that people like MPs and big businesses with hot shot accountants are free to exploit the system in this way and HMRC would shy away from clamping down on them whereas the pleb on the street might not be treated so leniently.

Firstly the MP's are a shower of tulip agreed but we simply can't go comparing our situation with theirs. We have to deal with that is on our plate and that only. Shifting the level of divi paid for no other reason than to keep yourself under the tax bracket is clearly something that ishouldnt stick. I am surprised husband and wife shareholdings is blatant avoidance but is allowed as in other areas it is acceptable to have the wife part of the business so justifiable. It is just HMRC don't have the time, effort or inclination to fix process that works for most situations but we manipulate. Because we manipulate loopholes that are incredibly difficult to close it will never be black and white. Wanting to give your wife dividends to avoid tax should be pretty black and white though...... but it appears not.

[northernladuk]

This still doesn't make sense to me. Why not just declare a smaller dividend if you want to retain funds in the company?

The idea is if you have 50/50 split and your wife suddenly starts working, giving the the 50% she is due will push her in to the next tax bracket so people want to waive a dividend for her to keep her below but still pay the husband the full amount as he hasn't reached his threshold. If you pay a lesser dividend to accommodate the wifes position the husband is missing out.

You do remember if it is 50/50 you must always give 50/50 dividends don't you?

Waiving dividends and class B type shares add a flexibility to allow you to say 1p under the tax bracket which quite obviously is used to avoid tax hence HMRC don't like it. Can't blame them really can you.

[lithium147]

As captainham says, avoiding putting one of the shareholders earnings into the higher rate tax bracket is not such a good reason. Mitigating circumstances may be present if the money was retained in the company to fund future expansion of the company.

This still doesn't make sense to me. Why not just declare a smaller dividend if you want to retain funds in the company?

[Wanderer]

So whats a good commercial reason?

As captainham says, avoiding putting one of the shareholders earnings into the higher rate tax bracket is not such a good reason. Mitigating circumstances may be present if the money was retained in the company to fund future expansion of the company.

Something Jessica@WhiteFieldTax might be able to offer an opinion on for us:

In the context of a husband and wife who are the only shareholders in a close company, is having A and B class shares just as bad as dividend waivers in the eyes of HMRC or is this somehow more acceptable.

The thing that I find difficult is that most of this is a grey area and we keep hearing that HMRC "don't like" certain trading structures. It's often difficult to know what's actually acceptable and what's not.... There is always a suspicion that people like MPs and big businesses with hot shot accountants are free to exploit the system in this way and HMRC would shy away from clamping down on them whereas the pleb on the street might not be treated so leniently.

[wiseguy]

Hi,
It's quite fascinating to read all the responses here. I am in a similar situation in that I am in the 40% tax bracket this year and my wife is not. I have been advised by accountant to split the shareholder split to give my wife 100% of shareholding and to split it back to 50:50 from next tax year. It's a completely different advise than what I am seeing here.

[captainham]

Scheming again? You really are a piece of work.

Found this: Dividend waivers: Get the details right | AccountingWEB
Is that a good guide?

What do you think?! Did you even read it?

Here's a quote from it:

"In practice HMRC are only likely to take the above settlement point where the waiver is considered to create a tax advantage."

Bearing in mind you are just trying to push the boundaries of what you can get away with tax-wise, then this no doubt rules you out.

This point seems to be key:

HMRC would prefer to see a commercial reason for the waiver (again see Buck v HMRC). Therefore, best to state in the deed that the waiver has been made to allow the company to retain funds for a specific purpose.

The case you refer to is over 10 years old. IANAA so a lot of it doesn't even make much sense to me, but the very first hit on Google for this case provides these comments from an article which is all I need to know:

"Mr and Mrs P do not seem to have been well advised (why do people continue to put these daft share structures in place? – Young v Pearce etc are cases which date back to the mid-nineties).

If you read the judgement you will also note that their accountant did not help. He seems to have backdated documents and not being legally versed meant that he missed a trick of two. He was lucky to have such a helpful judge take up the slack for him, but I wonder if the case would have gone to court if the couple had well, slightly more competent representation from the start?"

So whats a good commercial reason?

As stated in the link you provided:

"Therefore, best to state in the deed that the waiver has been made to allow the company to retain funds for a specific purpose."

I don't think "Lithium147 wants to maximise their yearly personal tax allowances" is an acceptable commercial reason.


But of course this is not the answer you want to hear, so as usual you go and do whatever it is you want to do.

[lithium147]

Horses for courses. I'm quite risk adverse, although ultimately it's clients call not mine.

To put things in context, I've applied divi waivers to 0.07% of my client base over the last 20 years.

But I regard them as low risk when done properly and used in the right circumstances. They are a tool, but not to be used recklessly.

So what are the "right circumstances"?

Found this: Dividend waivers: Get the details right | AccountingWEB
Is that a good guide?

This point seems to be key:

HMRC would prefer to see a commercial reason for the waiver (again see Buck v HMRC). Therefore, best to state in the deed that the waiver has been made to allow the company to retain funds for a specific purpose.

So whats a good commercial reason?

[Jessica@WhiteFieldTax]

All accountants have a different view to risk. Your idea of risk and my idea of risk are identical (don't try and be clever) theirs is somewhat different.

Horses for courses. I'm quite risk adverse, although ultimately it's clients call not mine.

To put things in context, I've applied divi waivers to 0.07% of my client base over the last 20 years.

But I regard them as low risk when done properly and used in the right circumstances. They are a tool, but not to be used recklessly.