There were a few jittery moments in the accountancy world when HM Revenue & Customs won a surprise victory.
The case involved a firm of consultants, PA Holdings Ltd, who devised a tax strategy to reduce PAYE and NI on bonuses. The company issued a special class of shares to employees, and then paid large dividends on them. This was challenged by HMRC.
The case was heard by both the Lower Tribunal and the Upper Tribunal, with the end result that it was held that the dividends were not subject to PAYE but were subject to both employers and employees NIC. This decision was taken to the Court of Appeal who ruled decisively in favour of HMRC, with the result that the dividends were held to be subject to both PAYE and NIC.
Originally, PA Holdings Ltd said that they would take the case to the Supreme Court. However, in a surprise move they announced that they had abandoned the appeal and accepted defeat.
This raises the question of whether the common practice of director/shareholders paying a low salary and high dividends remains safe. Fortunately, at the moment it seems that HMRC does not intend to challenge this distinction as a result of this victory. However, it does mean that companies should ensure that the correct paperwork is in place to support the distinction, including:
- A directors board minute to support the payment of interim dividends. Any final dividend should be supported by a members resolution, always remembering that the members in general meeting can only approve or decrease a dividend proposed by the company. They do not have the power to increase the proposed dividend.
- Dividend vouchers. These do not have to be given on each occasion that a dividend is paid. An annual voucher covering each tax year ending on 5th April is sufficient.
- Dividends can only legally be paid out of post-tax profits. If the accumulated profits shown in the previous year’s annual accounts are sufficient to cover the dividends paid since that date then that is sufficient. However, if they are not then there should be evidence that the directors have reasonably considered whether to company has sufficient profits at the date of the dividend payment to ensure that it is legal.
If you are affected by any of this and want further clarification then please, as always, contact us.