Reply to: Dividend Question

[oraclesmith]

Re. dividend vouchers, from direct.gov.uk website :-

Declaring dividend income on your tax return
If you normally complete a tax return you fill in three boxes:

the 'dividend/distribution' - the actual amount you were paid
the 'tax credit' - as shown on the dividend voucher
the total of these two - the ‘dividend income'
You pay any extra tax owing via either Self Assessment or PAYE (Pay As You Earn), depending on how you normally pay tax.
"

http://www.direct.gov.uk/MoneyTaxAnd...453&chk=FuPP1L

There is a minimum standard for dividend vouchers which you can get from various legal and government websites.


The retained profit from previous year would have attracted corporation tax, which you would have already paid (or be due to pay). If you make a loss in the current year, you can (amongst other things) set it against previous year profits and reclaim corporation tax. However, I don't know whether this would then allow you to issue further dividends on the remaining bank balance. You should have a chat with your accountant.

[VectraMan]

Also, make sure your shareholder(s) actually get their tax credit voucher and file it away for their self assessment tax return.

That's a new one on me as well, will have to ask the accountant.

Is there any issue with paying dividends on the previous year's profits? Obviously you might not pay the maximum amount of dividends in a year, choosing to leave the money in the company. If you made a loss in the second year, could you still pay money as a dividend because it was profit made in the first year, or would that money now become part of the second year's account, and no dividend would be allowable?

[oraclesmith]

More or less what I have, but does anything need to happen with that piece of paper beyond just keeping it?

Nope. You need to keep it with the other company structure documents (memo of association etc).

Also, make sure your shareholder(s) actually get their tax credit voucher and file it away for their self assessment tax return.

[VectraMan]

Here's an example. Obviously the name above the dotted line at the bottom is supposed to be the signature, even though it looks printed here.

More or less what I have, but does anything need to happen with that piece of paper beyond just keeping it?

[IR35 Avoider]

No she will be doing the books and other administrative stuff.

Do you think you can convince a tax commissioners hearing that you would give the same level of salary and dividends to a complete stranger, for doing the same work? If so, that argument will work.

Given that I pay my accountant a very small fraction of that amount for doing the accounts and she also acts as my company secretary for no extra charge, I think you'd find them pretty skeptical.

Another way of looking at it, is how many hours does she put in compared to you? If I divided my income with my accountant on that basis she would get roughly what I do pay her - of the order of 1% of turnover. (I'm probably putting the position a bit to strongly - if partner was getting up to about 5K as salary, I suspect there's no way they would argue with that, even if all she did was act as company secretary.)

I should stress that I am only playing devils advocate, presenting the HMRC position. With their defeat at the last stage of the test case it's quite hard to judge what the law is now. And for more than a decade prior to this test case, tens of thousands of contractors and their accountants believed there was nothing wrong with paying any amount of dividends to a partner, and there was no need to justify it in terms of their involvement in the business.

The problem is, that if HMRC do win and you are investigated, then six years worth of dividends to your partner will be treated as your income for the years in question, and taxed at the higher rate.

I should just clarify: I know S660 is only an issue with regard to dividends, salary only comes into it when assessing if the total rewards are disproportionate to involvement in the business. If they're not, then it it's only the dividend income that is in danger of being taxed as yours.

Although it's an unrelated issue, note that salary and pension contributions paid to you partner can be disallowed as an expense for corporation tax purposes, if your inspector of taxes does not believe you would have paid the same level of a remuneration to a complete stranger for doing the same work. Having said that, I think it is quite rare for this to be raised as an issue.

[IR35 Avoider]

I'm never quite sure what is meant by official minutes, and if a piece of paper saying "at the meeting at this date this happens" counts as official minutes, or whether something more formal needs to happen.

Here's an example. Obviously the name above the dotted line at the bottom is supposed to be the signature, even though it looks printed here.

[Diestl]

No she will be doing the books and other administrative stuff.

[VectraMan]

Stopped reading after Husbands and Wives, Im not married so doesn't apply.

Edit
Read further and is a bit vague on if it applies to non married couples? Anyway Ill assume Bastard Brown includes me, is there any way round it?

Husband and wife is just the classic example. As with all these things it's open to intepretation, but amounts to are you using the arrangement to avoid tax? If your partner has no other income, doesn't contribute to the business, but still contributes to the bills/rent/mortgage that otherwise you'd be paying, then it's hard to argue that it's anything other than about avoiding tax.

[Diestl]

Stopped reading after Husbands and Wives, Im not married so doesn't apply.

Edit
Read further and is a bit vague on if it applies to non married couples? Anyway Ill assume Bastard Brown includes me, is there any way round it?

[VectraMan]

Now My annual income is around 36000 and partners is 19200, both below higher tax rate, so no more tax to pay?

Is there any problem with this?

Exactly the reason behind S660. Look at the link over there ---->

[Diestl]

If I have a gross turnover of 70k in a year.

I pay a minimal salary to myself to just below the standard threshold @5k a year?. Assume 5k expenses a year. leaves 60k, less 19% CT, leaves 48600.

Now the company has me as a 60% shareholder and partner (not married) as 40% shareholder. I pay a £2600 monthly divi to myself and £1600 divi to partner monthly. This totals to 48000 paid out a divis a year and leaves 600 quid in the company.

Now My annual income is around 36000 and partners is 19200, both below higher tax rate, so no more tax to pay?

Is there any problem with this?

[ASB]

Although ACT is abolished, surely that's just a matter of timing ? You still need to ensure you have the whole CT tax amount in hand when you pay CT (ie. in relation to the dividends paid out plus any retained profits).

Yes, it is mainly timing. Since the abolition of ACT one has to more careful to ensure the CT is to hand when it is due, since in the ACT regime those years ago some of it was paid early.

As you say, broadly retain 20% of income for CT in a low salary high dividend environment and you are unlikely to go far wrong.

[oraclesmith]

Regarding the dividend that is not the position since ACT was abolished.

There is no CT on dividends, only profits. Dividends are paid net and attract a tax credit of 1/9th (i.e. 10% of the nominal gross dividend).

But the original question was about keeping back a sum in the company accounts to cover any tax on dividends paid out, presumably in advance of the final accounts and main CT being calculated and paid. Although dividends are technically paid out of profits after tax, in practise they are usually paid out before the CT is sorted out. And of course the profits themselves attract CT.

Although ACT is abolished, surely that's just a matter of timing ? You still need to ensure you have the whole CT tax amount in hand when you pay CT (ie. in relation to the dividends paid out plus any retained profits).

[ASB]

This is always the bit that worries me. According to my accountant, as a small company all I need to do is have a meeting by myself, sign a declaration form and keep a copy (and send one to them for tax records), which is what I've done. I'm never quite sure what is meant by official minutes, and if a piece of paper saying "at the meeting at this date this happens" counts as official minutes, or whether something more formal needs to happen.

This *might* help. http://www.accountancygroup.com/-ct=...5462&tlt=d.htm

[VectraMan]

Similarly, if you have not documented it properly with minutes of the meeting at which it was declared they may decide it was an illegal dividend and tax it as salary. If you only realise the need for minutes when you're inspected, and try to pass off back-dated minutes as having been produced at the time, that is a criminal offense for which people have been sent to jail in the past. Do not assume your "full service" accountant produces these minutes, apparently this mistaken assumption is the most common reason people get into trouble with this.

This is always the bit that worries me. According to my accountant, as a small company all I need to do is have a meeting by myself, sign a declaration form and keep a copy (and send one to them for tax records), which is what I've done. I'm never quite sure what is meant by official minutes, and if a piece of paper saying "at the meeting at this date this happens" counts as official minutes, or whether something more formal needs to happen.