Limited Company owners - Dividends or Salary?
Well, what we have here is the Revenue trying to crank up the tax collection yield from your sort of company. The Chancellor’s budget deficit needs to be filled somehow and this is one way of helping to do just that.
Basically, the Revenue are now looking a lot more closely at situations where dividends are being paid to shareholders who are not really contributing to the wealth of the company. The thrust of the Inland Revenue’s challenge here is to tax these dividends back on the individuals creating the wealth and which may lead to more tax being payable to them. Depending on the circumstances, the Revenue may wish to go back up to six years and rewrite the position. Besides picking up more tax, they will be looking for interest and possibly also penalties.
So, what are the sorts of situation that are likely to attract the Revenue’s attention? Common examples include:
* The regular use of dividend waivers to divert dividend income from higher rate taxpayers to lower rate taxpayers.
* Share structures involving different classes of share with varying levels of dividend being paid on each type of share (again, often with lower rate taxpayers receiving an increased rate of dividend compared to higher rate tax shareholders).
* Situations where shares are regularly being transferred around the family to vary dividend distributions.
What the Revenue are specifically looking for are arrangements where a right to income has in effect been gifted from one person to another. They will attempt to tax the income gifted back onto the person that has attempted to give it up. This is particularly so where the rate of dividend being received is out of all proportion to the investment made by the shareholder into the company.
Coming back to dividend waivers, another problem area is the payment of an excessive dividend. In other words, if but for the waiver, the company did not have enough profits to pay that rate of dividend to all shareholders then the Revenue may well try to invalidate the dividends.
What can be done to fend off any such type of Revenue challenge? Good defences include:
1. Following the correct procedures for declaring and paying dividends and ensuring that all paperwork is in order. (board minutes, dividend vouchers, waiver documents etc).
2. Creating or reorganising share structures that give shareholders more than just a right to income.
3. Not being overly aggressive with your arrangements and having some heed for commercial reality.
4. Using good advisers! A lot of this is only Revenue interpretation of the law and, as always, there are different views and positions on various points. Common sense and pragmatism have a role to play in dealing with Revenue enquiries.
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