Reply to: Share restructure. Alphabet shares for better divi distribution.

[meridian]

HMRC may argue but how can they prove any settlement in this case?.

Their modus operandi is usually to send you a bill for the back taxes first, and then it’s up to you to argue otherwise. They won’t need to prove settlement, it’s up to you to prove that it’s not.

[northernladuk]

I asked about this in accounting the other day, hadn't seen this one (why is it in general?)

If the OP wishes to read it.

Because the OP is a cockwomble.

Instead of looking at a situation and investigating it he's just throwing ideas around to evade tax without putting any thought or research in to it. Have a look at his started thread history.

[d000hg]

I asked about this in accounting the other day, hadn't seen this one (why is it in general?)

If the OP wishes to read it.

[WTFH]

184?

[pscont]

For a "standard" contractor, the new IR35 regime where income is taxed at source by the agency would make most of this rather pointless.

<mod snip> Mind your language </modsnip>

[tomtomagain]

For a "standard" contractor, the new IR35 regime where income is taxed at source by the agency would make most of this rather pointless.

[WTFH]

Say you have a advertising company as a family business so it is you, spouse and 4 parents. Shares: 51%, 49% regulars and 1 x A,B,C, and D. Parents are not directors - could be subcontractors or on commission.

This is a creative business, so very hard to prove that anyone of the parents doesn't bring the majority of the income for any given project by coming up with the best advert idea.

Then paying them as much/little divi as their allowances can absorb. HMRC may argue but how can they prove any settlement in this case?

I appreciate the above is very specific case but if I think more I will come up with more like this.

OK, rather than trying to come up with specific cases that you have imagined so that you can try to argue one way or another, maybe you should stick to the practical example of your current company, the type of business it does and what you are wanting to achieve.

Cause it sounds like all you are doing is dreaming up hypothetical scenarios to try to commit tax fraud.

In a previous hypothetical scenario of yours, you didn't have a wife or kids, but then the next thing was your parents were buying presents for your kids - maybe a mars bar, maybe a ferrari for their 18th, etc.

[pscont]

It's not clear cut. It's very complicated. That it makes it a bad idea. If it had little risk and was advisable then we'd all be doing it. The fact we don't speaks volumes.

It is risky, I admit.

Just wondering how can a family business survive, (not IT one) but the above explains it. And still....

Say you have a advertising company as a family business so it is you, spouse and 4 parents. Shares: 51%, 49% regulars and 1 x A,B,C, and D. Parents are not directors - could be subcontractors or on commission.

This is a creative business, so very hard to prove that anyone of the parents doesn't bring the majority of the income for any given project by coming up with the best advert idea.

Then paying them as much/little divi as their allowances can absorb. HMRC may argue but how can they prove any settlement in this case?

I appreciate the above is very specific case but if I think more I will come up with more like this.

[northernladuk]

Of course. I’m simply saying that it’s not as clear cut as some posters seem to think it is.

From a link on the page you linked to above:

Contractor guide to splitting dividends

It's not clear cut. It's very complicated. That it makes it a bad idea. If it had little risk and was advisable then we'd all be doing it. The fact we don't speaks volumes.

[meridian]

He doesn't necessarily have to file an SA. Depends how much we are talking.

And it might be a winner for dad but it won't be for the contractor.

How much could the settlements legislation S624 ITTOIA 2005 cost contractors?

Of course. I’m simply saying that it’s not as clear cut as some posters seem to think it is.

From a link on the page you linked to above:

Contractor guide to splitting dividends

The spousal exemption confirm by the Arctic Systems case only applies to a non-fee-earning spouse or civil partner, and not a non-fee-earning partner, family member or friend.

Therefore to avoid being caught in the settlements legislation trap, it is recommended that the shareholding non-spouse becomes a director of the company and plays a significant role in the management of the company. In addition, the share allocation should reflect the work undertaken by the two parties; so this is likely to lead to splits like 60:40 or 70:30, rather than the traditional 50:50.

The shareholder and director who is not the main fee earner and not a spouse or civil partner should clearly have a role in the business to justify earning the dividends. This could be managing administration, so that the contractor is completely free to focus on fee earning, or doing some marketing. A partnership with one director earning fees and the other ensuring they are able to do so and being paid, say, 30% of the dividend is perfectly legitimate.

Typical support tasks for a non-fee-earner which is not a spouse include holding the company minute book, bookkeeping and managing the money, answering calls and correspondence, plus marketing, which might include searching for contract opportunities and running the company website.

[northernladuk]

It’s not as far-fetched as it sounds.

The company will need to pay full tax on pre-dividend income anyway. Any saving will come from splitting the dividends sufficiently so that OP and his beneficiary (say, Dad) are both under the higher rate tax threshold.

Dad will now need to furnish a self-assessment every year and include these dividends, so unless he does it himself that will be extra for the accountant. Plus he’s now brought himself to the attention of HMRC.

Any hint that the income is coming back from Dad to son will be taken as evasion and taxed in full plus penalties. So any future loan for, say, a deposit on a house will need to be drawn up legally as a loan (with interest, etc) to avoid any suggestion of impropriety.

Apart from having to now furnish a self assessment return, it looks like a winner for Dad.

He doesn't necessarily have to file an SA. Depends how much we are talking.

And it might be a winner for dad but it won't be for the contractor.

How much could the settlements legislation S624 ITTOIA 2005 cost contractors?

[meridian]

As much as can evade the most tax..

It’s not as far-fetched as it sounds.

The company will need to pay full tax on pre-dividend income anyway. Any saving will come from splitting the dividends sufficiently so that OP and his beneficiary (say, Dad) are both under the higher rate tax threshold.

Dad will now need to furnish a self-assessment every year and include these dividends, so unless he does it himself that will be extra for the accountant. Plus he’s now brought himself to the attention of HMRC.

Any hint that the income is coming back from Dad to son will be taken as evasion and taxed in full plus penalties. So any future loan for, say, a deposit on a house will need to be drawn up legally as a loan (with interest, etc) to avoid any suggestion of impropriety.

Apart from having to now furnish a self assessment return, it looks like a winner for Dad.

[northernladuk]

OK, so you want to give your parents some money by giving them shares, and you are counting on it never being provable that the money is going to come back to you.

How much money are we talking here?

As much as can evade the most tax..

[WordIsBond]

Nothing to elaborate if you pay divi to your dad.
The money will never come back to you, but he might buy a chocolate for the kid when he visits.
So it depends.

OK, so you want to give your parents some money by giving them shares, and you are counting on it never being provable that the money is going to come back to you.

How much money are we talking here?

[WordIsBond]

There is usually little reason for having different classes of shares if they all have the same rights, unless you want to make the classes separately redeemable or such.

All shares have the same voting rights.

Class A shares (90% of total shares) are owned by my bride and me, 45% each.

Class B shares are owned by PAYE employees and subcontractors roughly in proportion to their contribution to our contracting revenue stream. Two employees have gifted half of their shares to spouses. Effectively, we use dividends on Class B shares as a tax-efficient bonus scheme. It does mean that if someone has a less productive year they will still get a proportional take on the dividends, but that fosters a team mindset which is useful because many of our contracts end up being team projects anyway. Class B shares are indeed separately redeemable but that is not the only purpose or even the primary one for having them. The purpose was to give employees an equity stake and profit sharing (that's definitely a business reason and one that HMG seems to think is good) without ceding control of the company (that's also definitely a business reason). Class B shares receive more total dividends than Class A. To accomplish that without alphabet shares would give up control.

Class C shares came into existence because one employee left the contracting wing to pursue an R&D project as I described in an earlier comment. The shareholding reflects the business reality that we have two different businesses going now.

It's hard to imagine a business reason for a one-man band to use alphabet shares. Advisors may be recommending them for spouses to take advantage of the £2K dividend allowance. That makes tax sense but it is hard to come up with a reason that it helps the business. The amount involved is small enough that HMRC may never challenge it.