Having had a nice break over Christmas, we thought we might revisit the question of dividends paid to director/shareholders. Many one man companies use dividends as a means to provide tax and NI efficient payments to the director/shareholder. In many cases, the payments are simply transfers of cash with no specific purpose, and it is left to the accountant at the end of the year to sort out what goes where.
This treatment may have been sufficient in the past but it is now getting less acceptable for a number of reasons.
Firstly, and without wishing to overstate this, there is a case where the Court of Appeal has held that dividends are salary for both tax and NI purposes. The taxpayer has been given leave to take the case to the Supreme Court, and some people are wondering whether, the tax office wins again, there may be a general attack on the use of dividends. The general view is that this will not happen. However, the likelihood of an individual arrangement being challenged even now is increased if the paperwork is not complete.
Secondly, and more importantly, many director/shareholders have invested money in the form of loans into their company. If this loan is sufficiently large to cover all payments made by the company to the director then the payments could justifiably be regarded as repayments of that loan, with the loan being increased afterwards by the payment of a salary and dividend. However, two things are happening that may affect this interpretation:
- With the downturn in the economy over the past few years, the profitability of many companies has fallen, with the result that the dividends and salary voted in the accounts have failed to fully cover the withdrawals made. An increasing number of director/shareholders are now finding that their loan to the company is insufficient to cover the withdrawals during the year, and this can create significant taxation repercussions.
- With the forthcoming introduction of Real Time Information, failure to notify the tax office in advance of payments that are subject to PAYE deductions being made can lead to substantial penalties, and these penalties are for each occurrence of this heinous crime. If payments are of a non-specific nature then it will be more difficult to refute any assertion by the tax office that they should be subjected to the Real Time Information rules.
Our advice is that it is more important now than ever to ensure that the exact nature of each and every payment to a director/shareholder is determined and that the correct paper trail to support that payment is created.
WatkinsonBlack are pleased to provide advice on these and other matters. They have considerable experience and expertise, and their services include providing a very cost-effective payroll bureau service. If you want to arrange a no-obligation initial meeting on any taxation or accounting matter then please contact us. Please note that these ideas are intended to inform rather than provide advice and you should always obtain professional advice before taking any action.