How to avoid the Pitfalls of Dividend Waivers

business man in a crisis

Dividends always need to be handled with care and its a topic I commented on in my blog “Things you need to know about Dividends…..” but you should also be aware:

  1. Dividends are paid at the same rate for each category of share in accordance with the number of shareholdings held
  2. CTA10/S1168(1) specifies that dividends are treated as paid for the purposes of the Corporation Tax Acts ‘on the date when they become due and payable’
  3. Never be tempted to backdate board minutes and dividend vouchers, as the documents will be legally void and can constitute a criminal offence.

There are times when, for good reasons, a Shareholder may wish to waive their right to a dividend, but HMRC are well aware that often waiving a dividend can have tax implications (bounty and settlement) and they have the following advice in TSEM4225

Not all dividend waivers are vulnerable to challenge. Where a company with few shareholders declares a dividend when one or more of the shareholders has waived their right to a dividend in circumstances where other shareholders may benefit, it is possible the Settlements legislation could apply. You should look out for the following factors, which would indicate that the Settlements legislation is likely to apply.

  • The level of retained profits, including the retained profits of subsidiary companies, is insufficient to allow the same rate of dividend to be paid on all issued share capital.
  • Although there are sufficient retained profits to pay the same rate of dividend per share for the year in question, there has been a succession of waivers over several years where the total dividends payable in the absence of the waivers exceed accumulated realised profits.
  • There is any other evidence, which suggests that the same rate would not have been paid on all the issued shares in the absence of the waiver.
  • The non-waiving shareholders are persons whom the waiving shareholder can reasonably be regarded as wishing to benefit by the waiver.
  • The non-waiving shareholder would pay less tax on the dividend than the waiving shareholder.

So if you are thinking of waiving dividends, bare the following in mind:

  1. A formal Deed of Waiver is required, the Deed will say that the Dividend is Irrevocably Waived, it must be dated before the right to dividend arises, it must be signed and witnessed and filed with the company statutory records
  2. You should have a good commercial reason for the Waiver which could be to retain funds for a specific purpose and this could be stated in the Deed
  3. Don’t make a habit of waiving dividends as it will increase the risk of questions from HMRC
  4. Don’t give inducements to encourage Dividend Waivers
  5. Make sure your dividends are legal – see my Blog “Things you need to know about Dividends…..”