Dividend waivers

[TheCyclingProgrammer]

I think that would be one reason why you need a single class of share. Different share types may result in different voting rights and capital distributions. Getting that 100% HMRC complaint is probably not something many accountants want to do....

Which is why the share class has to be stated as ranking "pari passu". Some discussion on this here:
What qualifies as a class of shares for the purposes of issuing a Dividend? | AccountingWEB

[eek]

On the face of it you're right; as long as the different classes of shares were ranked pari passu then it would be hard to imagine how HMRC could challenge that (assuming the shareholders were either unmarried or if married, that the spouse exemption applied). The Arctic ruling showed that the shares were more than a gift of income not because they were ordinary shares per se, but because they carried full voting rights and a right to any capital on winding up. Presumably any other classes of shares with these rights would satisfy this requirement.

However in my research many accountants still seem uncomfortable with different share classes, even if it can be shown that the spouse exemption applies. Why is this?

I think that would be one reason why you need a single class of share. Different share types may result in different voting rights and capital distributions. Getting that 100% HMRC complaint is probably not something many accountants want to do....

[TheCyclingProgrammer]

How on earth did they think the planned approach was going to work? I would love to know who their advisors were as there is a simple way to do what they wanted to do (by issuing 2 class of shares).

On the face of it you're right; as long as the different classes of shares were ranked pari passu then it would be hard to imagine how HMRC could challenge that (assuming the shareholders were either unmarried or if married, that the spouse exemption applied). The Arctic ruling showed that the shares were more than a gift of income not because they were ordinary shares per se, but because they carried full voting rights and a right to any capital on winding up. Presumably any other classes of shares with these rights would satisfy this requirement.

However in my research many accountants still seem uncomfortable with different share classes, even if it can be shown that the spouse exemption applies. Why is this?

[Jessica@WhiteFieldTax]

Yes, I think the key thing is the lack of available reserves to cover the dividend if it had been paid in full. This is hardly new, I think we've known about HMRCs views around this for 15 years.

And, yes, you've got to ask what advice was received, if any. If they were advised, then, all other things being equal - and we never know all the facts of course - the advisers may need to dust down their PI policy.

[TheCyclingProgrammer]

This shouldn't come as much of a surprise. HMRC have outlined their view on dividend waivers here:

TSEM4225 - Dividend waiver - when Settlements legislation may apply

And now they have another case to back their view up.

As well as the things stated (particularly that there was not enough profit to pay the full dividend including the waived amount), its important to realise why the spouse exemption does not apply in this case, namely that its not the transfer of shares to the partners that is being challenged but the waivers themselves.

Both the transfer of shares and waivers constitute a settlement but whilst the transfer of shares can be exempted by the spouse exemption (so long as they are ordinary shares and not just a right to income as shown by Arctic), the waivers cannot be exempted because they are considered as nothing more than a right to income.

That's not to say that any dividend waiver would be caught; as ASB says, any waiver is potentially a bounteous arrangement, so its important that the person (or their spouse) waiving the dividend benefits in some way (retains an interest). On that basis, its unlikely that a waiver between two unconnected shareholders (e.g. business partners or possibly even unmarried partners) would be caught.

If you look at the Buck judgement, it was deemed that the waiver should be taxable on Mr Buck not because he personally retained an interest/benefitted in the income, but because his wife did and as the spouse exemption did not apply, they were caught. That's also what happened in this new case.

The wording of the legislation means a person is automatically treated as retaining an interest if their spouse (or civil partner) does. That's why its important that the spouse exemption exists - to avoid genuine outright gifts between spouses from being caught. If it didn't exist, any settlement between spouses would *always* be caught by virtue of the way the main clause is worded. If Mr and Mrs Buck had not been married, they may have won unless HMRC could have then shown that Mr Buck himself directly retained an interest although there is no suggestion of this in the judgement.

I think, so long as you have sufficient profit to cover the full dividend, you may get away with the occasional waiver and I literally mean, once or twice (though this result probably increases the risk factor of even doing it once). I don't think I'd do it myself. Doing it frequently is like waving a red rag at a bull.

[ASB]

I missed that bit That was the key in Buck (which I saw was referenced as I skimmed through the judgement), which makes sense.

A thin to consider also, in terms of risk is reward. It seems quite clear to me that a rate of dividend which only becomes possible does contain an element of bounty. Whether it should be caught by the provisions is a different matter.

Equally any dividend waiver at all is possibly bounteous. Would I do it with other non connected shareholders? Likely not, but there could be circumstances.

However, what is the downside? I guess that depends on any penalties.

The tax reason for doing it would be to get more of the income taxed at a lower rate. If it fails then one is not really any worse off, the tax bill goes back to what it originally would have been.

So the cost is any penalties, any interest and any representation.

It seems to me that the maximum tax saving in any one year is going to be half of the standard rate band x 20%; so this is only going to be a few thousand. Given the costs of ending up at an FTT the risk/reward seems all skewed to me.

[DirtyDog]

I wonder if this was key:-

"The company had insufficient distributable reserves to pay the dividends if there had been no waivers"

Certainly this is something that is regularly highlighted as increasing the risk.

I missed that bit That was the key in Buck (which I saw was referenced as I skimmed through the judgement), which makes sense.

[eek]

Report on AccountingWeb today about a failed Dvidend Waiver scheme.

Useful background if this is something you do, or are minded to do.

Tribunal rules dividend waiver was settlement | AccountingWEB

How on earth did they think the planned approach was going to work? I would love to know who their advisors were as there is a simple way to do what they wanted to do (by issuing 2 class of shares).

"The company had insufficient distributable reserves to pay the dividends if there had been no waivers"

is the crux of the matter. You can't pay a dividend on money you haven't got and a waiver is a separate decision that as a director you cannot assume actually exists.

[ASB]

Report on AccountingWeb today about a failed Dvidend Waiver scheme.

Useful background if this is something you do, or are minded to do.

Tribunal rules dividend waiver was settlement | AccountingWEB

I wonder if this was key:-

"The company had insufficient distributable reserves to pay the dividends if there had been no waivers"

Certainly this is something that is regularly highlighted as increasing the risk.

[DirtyDog]

One presumes that when they paid their £3200 a share dividend, the company had retained profit of £320000 to be able to declare a dividend of that size in the first place.

In the same way in Buck the company would have had to have reserves of £300million for the dividend to be valid.

[Jessica@WhiteFieldTax]

Report on AccountingWeb today about a failed Dvidend Waiver scheme.

Useful background if this is something you do, or are minded to do.

Tribunal rules dividend waiver was settlement | AccountingWEB