Does a Company pay tax if it receives a Dividend? Reply

We generally recommend creating a holding company to hold property investing companies as it helps to centralise management and can give guarantees to lenders.

Many business owners have a concern that if the holding company receives dividends from subsidiaries that they will be double taxed, once in the subsidiary (before paying dividends) and then on the profit in the holding company when in receives the investment income (dividends). This would be madness!

Dividends paid to UK Holding Companies are normally exempt from Corporation Tax.

https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm15150

A distribution made by a UK resident company and received by a UK resident company is generally not included in the recipient company’s CT profits. Similarly, such a distribution received by a non-UK resident company trading through a UK permanent establishment is not generally included in the CT profits of that permanent establishment. However, the way in which distributions received by companies are treated for tax purposes changed from 1 July 2009:

  • Until 1 July 2009, ICTA88/S208 (and for a brief period CTA09/S1285) provided that corporation tax was not chargeable on distributions from UK resident companies.
  • From 1 July 2009, the way in which distributions from UK resident companies are taxed was aligned with the treatment of distributions from non-UK companies in CTA09/S931A. (Previously, distributions from non-UK resident companies were charged to corporation tax as income from foreign possessions under ICTA88/S18, that is, under Case V of Schedule D). CTA09/S931A charges distributions from UK and non-UK resident companies to corporation tax, but then exempts these from charge in most cases. In practice, this means that most distributions – UK and non-UK sourced – are not chargeable to corporation tax unless these form part of avoidance arrangements.

steve@bicknells.net

What are the consequences of unlawful dividends? Reply

Businessman in police lineup backdrop, illustration, vector

What are the requirements for a legal dividend?

Companies Act 2006 Section 830 – Distributions to be made only out of profits available for the purpose

(1)A company may only make a distribution out of profits available for the purpose.

(2)A company’s profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.

(3)Subsection (2) has effect subject to sections 832 and 835 (investment companies etc: distributions out of accumulated revenue profits).

A distribution must be justified by

  1. The Company’s last published accounts
  2. Interim Accounts
  3. Initial Accounts

In small businesses having the right paperwork is vital should HMRC raise any questions, you will need:

  • Board Minutes
  • Dividend Vouchers

What are illegal dividends?

Companies Act 2006 Section 847 – Consequences of unlawful distribution

(1)This section applies where a distribution, or part of one, made by a company to one of its members is made in contravention of this Part.

(2)If at the time of the distribution the member knows or has reasonable grounds for believing that it is so made, he is liable—

(a)to repay it (or that part of it, as the case may be) to the company, or

(b)in the case of a distribution made otherwise than in cash, to pay the company a sum equal to the value of the distribution (or part) at that time.

(3)This is without prejudice to any obligation imposed apart from this section on a member of a company to repay a distribution unlawfully made to him.

Mistakes can happen..

Mistakes can happen even to large companies like NEXT PLC

Whilst the Company always had sufficient reserves to pay the Relevant Distributions at the time that they were made, the Act required this to be demonstrated by reference to interim accounts filed at Companies House prior to payment. Regrettably, those interim accounts were not filed with Companies House until after the Relevant Distributions had been paid and after the lapse had been identified.  No fines or other penalties have been incurred by the Company.

Section 386 Duty to keep accounting records

(1)Every company must keep adequate accounting records.

(2)Adequate accounting records means records that are sufficient—

(a)to show and explain the company’s transactions,

(b)to disclose with reasonable accuracy, at any time, the financial position of the company at that time, and

(c)to enable the directors to ensure that any accounts required to be prepared comply with the requirements of this Act (and, where applicable, of Article 4 of the IAS Regulation).

(3)Accounting records must, in particular, contain—

(a)entries from day to day of all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place, and

(b)a record of the assets and liabilities of the company.

(4)If the company’s business involves dealing in goods, the accounting records must contain—

(a)statements of stock held by the company at the end of each financial year of the company,

(b)all statements of stocktakings from which any statement of stock as is mentioned in paragraph (a) has been or is to be prepared, and

(c)except in the case of goods sold by way of ordinary retail trade, statements of all goods sold and purchased, showing the goods and the buyers and sellers in sufficient detail to enable all these to be identified.

 

steve@bicknells.net

Have you paid unlawful dividends by accident? 5

Regretful businessman in prison

Mistakes can happen even to large companies like NEXT PLC

Whilst the Company always had sufficient reserves to pay the Relevant Distributions at the time that they were made, the Act required this to be demonstrated by reference to interim accounts filed at Companies House prior to payment. Regrettably, those interim accounts were not filed with Companies House until after the Relevant Distributions had been paid and after the lapse had been identified.  No fines or other penalties have been incurred by the Company.

So what are the rules….

Companies Act 2006 Section 830 – Distributions to be made only out of profits available for the purpose

(1)A company may only make a distribution out of profits available for the purpose.

(2)A company’s profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.

(3)Subsection (2) has effect subject to sections 832 and 835 (investment companies etc: distributions out of accumulated revenue profits).

A distribution must be justified by

  1. The Company’s last published accounts
  2. Interim Accounts
  3. Initial Accounts

In small businesses having the right paperwork is vital should HMRC raise any questions, you will need:

  • Board Minutes
  • Dividend Vouchers

steve@bicknells.net

10 ways to pay less income tax Reply

Pay Packet And Banknotes

Income Tax is a tax you pay on your income. You don’t have to pay tax on all types of income.

You pay tax on things like:

  • money you earn from employment
  • profits you make if you’re self-employed – including from services you sell through websites or apps
  • some state benefits
  • most pensions, including state pensions, company and personal pensions and retirement annuities
  • interest on savings and pensioner bonds
  • rental income (unless you’re a live-in landlord and get £4,250 (£7,500 from April 2016) or less)
  • benefits you get from your job
  • income from a trust
  • dividends from company shares

So how can you pay less income tax?

Here are 10 suggestions…

  1. Pension

When you pay into a pension you get income tax relief on your contributions .

Lets say you invest £10,000 per year of earned gross income, increasing each year by 3% for inflation and see the effect of tax relief at 40% and 20%, assuming a return on the investment of 7% (which you should get with Commercial Property Investment)

40% Tax Rate 20% Tax Rate
Year Pension No Pension % Diff Year Pension No Pension % Diff
1 £10,700 £6,252 71% 1 £10,700 £8,336 28%
2 £22,470 £12,954 73% 2 £22,470 £17,272 30%
3 £35,395 £20,131 76% 3 £35,395 £26,841 32%
4 £49,564 £27,808 78% 4 £49,564 £37,078 34%
5 £65,077 £36,013 81% 5 £65,077 £48,017 36%
6 £82,036 £44,773 83% 6 £82,036 £59,698 37%
7 £100,555 £54,119 86% 7 £100,555 £72,158 39%
8 £120,754 £64,081 88% 8 £120,754 £85,441 41%
9 £142,761 £74,692 91% 9 £142,761 £99,590 43%
10 £166,715 £85,987 94% 10 £166,715 £114,649 45%
11 £192,765 £98,000 97% 11 £192,765 £130,667 48%
12 £221,070 £110,771 100% 12 £221,070 £147,694 50%
13 £251,801 £124,337 103% 13 £251,801 £165,782 52%
14 £285,140 £138,740 106% 14 £285,140 £184,987 54%
15 £321,285 £154,024 109% 15 £321,285 £205,365 56%
16 £360,445 £170,233 112% 16 £360,445 £226,978 59%
17 £402,846 £187,416 115% 17 £402,846 £249,888 61%
18 £448,731 £205,621 118% 18 £448,731 £274,161 64%
19 £498,358 £224,901 122% 19 £498,358 £299,868 66%
20 £552,006 £245,309 125% 20 £552,006 £327,079 69%

Even when you consider:

  • Your money is locked up till you are 55
  • You pay tax when you take money out of the pension
  • You can get 25% out of the pension tax free

The difference in growth is massive

If you do salary sacrifice you can increase the tax effect by saving national insurance too.

2. ISA

Individual Savings Accounts have been around for a few years and very soon the Help to Buy ISA will be launched

Help to Buy ISA

Top 10 facts and rules…

  1. Its only available to ‘First Time Buyers’
  2. ‘First Time Buyers’ can only have one Help to Buy ISA with one provider
  3. You can pay in £1,000 when you open the account and then save a maximum of £200 per month
  4. The maximum government bonus is £3,000 (but you can lower amounts of bonus if you have less than £12,000)
  5. The scheme will run for 4 years from the date it opens (Autumn 2015)
  6. Couples can have a Help to Buy ISA each which means if they don’t want to wait 4 years could save £12,000 in 25 months where as a single saver would need 55 months
  7. Unlike ISA’s where you open one per year, the Help to Buy ISA will continue for 4 years
  8. You can withdraw funds but if its not to buy a home then you won’t get the bonus
  9. More than 100,000 homes have now been bought with government backed schemes
  10. You will be able to get them at banks and building societies

3. Salary Sacrifice

Salary Sacrifice is a very tax efficient way to give your employees benefits and the most popular benefits are Pensions and Childcare. I wrote a blog back in 2011 which explained how it can save 45.8% in tax and NI

HMRC decided on 9th April 2013 that it was time to “clarify”  in their Manuals what are successful and unsuccessful salary sacrifice schemes and have added some further guidance. Their Staff are instructed not to approve schemes (Employment Income Manual EIM42772)….

You (HMRC) may get requests for advice:

  • on how to set up a salary sacrifice arrangement, or
  • on whether draft documentation will achieve a successful salary sacrifice.

You (HMRC) should not comment on either of these areas. Salary sacrifice is a matter of employment law, not tax law. The nature of an employee’s contract of employment is a matter for the employer and employee.

The specific updates are:

EIM42750 – Salary Sacrifice – updated – this contains the examples of schemes

EIM42777 – Contractual arrangements – this has interesting comments on childcare and pensions

4. Employment Expenses

As an employee you can claim tax relief for expenses incurred in doing your job, for example business mileage, cycling on business, hotels, meals, business phone calls, in fact anything as long as its business related

If your claim is less than £2500 you can make your claim using Form P87 http://www.hmrc.gov.uk/forms/p87.pdf if its more than £2500 you will need to complete a Self Assessment Return (you need to phone HMRC to request a Self Assessment Return – contact details below), if you know your UTR number you can register and file your Self Assessment Return on line.

5. Dividends

When you take dividends has never been more critical due to changes in the Summer Budget 2015, so if you have distributable reserves you might want to take more dividends this tax year, try the Dividend Calculator above to see how much difference it could make.

Dividend Calculator 2

6. Tax break for Couples

A new tax break as launched this week from 6 April 2015, which will be eligible to more than 4 million married couples and 15,000 civil partnerships.

The Allowance means a spouse or civil partner who doesn’t pay tax – therefore is not earning at all or is earning below the basic rate threshold (£10,600) – can transfer up to £1,060 of their personal tax-free allowance to a spouse or civil partner – as long as the recipient of the transfer doesn’t pay more than the basic rate of income tax.

7. Tax Free Benefits

Getting tax free benefits will save you lots of tax, here some ideas…

  1. Pensions – Up to £40k can be paid in to you pension scheme by your employer (2015/16)  and you can use carry forward to pay in even more
  2. Childcare – Up to £55 per week but check the rules to makesure your childcare complies (HMRC Leaflet IR115) – these rules are changing soon.
  3. Mobile Phone – One per employee
  4. Lunch – Tax Free Lunch Blog
  5. Cycle Schemes – Cycle to Work Blog
  6. Fitness – Fitness Blog
  7. Parties and Gifts – Christmas Blog
  8. Parking – Parking Blog
  9. Business Mileage Allowance – 45p for the first 10,000 miles then 25p
  10. Long Service Award – A bit restrictive as you need 20 years service, the tax free amount is £50 x the number of years
  11. Eye Tests and Spectacles – The Eye Test must be needed under the Health & Safety at Work Act
  12. Suggestion Schemes – Suggestion Scheme Blog
  13. Insurance such and Death in Service and Income Protection – Medical Insurance Blog
  14. Travel Expenses – Travel Blog
  15. Working From Home – Working from Home Blog

8. Earn less than £100k

Your Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £121,200 or above.

9. Green Company Car

A calculator is available here: http://www.hmrc.gov.uk/calcs/cars.htm and rates are shown in the table below for zero emission vehicles and some of the lower CO2 vehicles.

BIK CO2

10. Check your P800

The P800’s are likely to contain errors because:

  1. Large amounts of data are manually input
  2. Estimates especially for Bank Interest and Investment Income

So check the following carefully:

  1. P60 – you get this at the end of each tax year
  2. P45 – you get this when you leave a job
  3. PAYE Coding Notice
  4. P11D Expenses and benefits
  5. P9D Expenses payments and income from which tax cannot be deducted
  6. Bank and Building society statements
  7. Pension Tax Deductions

Its expected that around 3 million people will be asked to pay more tax and around 2 million people will have overpaid.

 

steve@bicknells.net

Contact Us

Can my children own shares in my company? 3

Young working boy with tie on computer

The s660 rules (or settlements legislation) have been around since the 1930s.

The rules stop you passing income to someone else in the family, or giving income or assets to someone else in an effort to reduce your overall tax bill. This is called a “settlement”, and the aim of the legislation is to stop people settling their income on another person who pays tax at a lower rate. (Contractor UK)

There are some interesting cases where business owners have tried to pass shares to their children unsuccessfully

Copeman v Coleman [1939] 22 TC 594

A company had been formed to take over the taxpayer’s business. He held the shares equally with his wife. Later the company created a class of preference shares of £200 each carrying a fixed preferential dividend, the right to vote if such dividend were in arrear for three years or more and the right in a winding up to a return of capital paid up. Some of the shares were taken up by his children on which they paid £10 per share. Dividends substantially in excess of the amounts paid up were then declared and the taxpayer, on behalf of his children claimed repayment of the tax paid in respect of the dividend to the extent of that child’s personal allowance. (http://swarb.co.uk/copeman-v-coleman-1939/)

Crossland v Hawkins [1961] 39 TC 493

The taxpayer, a well known film actor, agreed to work through a company for three years being paid £50 per week. The shares were transferred to his wife and accountant. His father in law set up a £100 settlement for the benefit of his children of which his wife and accountant were the trustees. The fund was used to subscribe for the remaining 98 shares. He appeared in a film for which the company was paid £25,000. The company paid a dividend which was applied by the trustees for the benefit of the children. Jack Hawkins then applied on behalf of his children for a repayment of tax to give effect to their personal allowances. The repayment claim was rejected on the grounds that the whole arrangement was a settlement of which Jack Hawkins was a settlor because he had provided the funds for it. (http://swarb.co.uk/crossland-v-hawkins-ca-1961/)

Butler v. Wildin [1989] STC 22

A company was formed by two brothers who acted as unpaid directors. Shares in the company were initially held by their infant children, which were paid out of gifts from their grandparents. The company acquired a development site using a bank loan, which was guaranteed by the brothers. The company subsequently became profitable, and dividends were subsequently paid to the infant shareholders. The High Court held that the children’s investment of ‘trifling sums’ in the shares and the parent’s provision of services to the company constituted an arrangement. An element of bounty was given by the parents in the free provision of their skill and services, and by adopting any financial risk in the company’s venture. Dividends paid to those children born before the arrangements were made (but not dividends in respect of shares transferred to children born afterwards, as there was no apparent arrangement to benefit future children) were taxable on the parents, under what is now section 660B.(http://www.taxationweb.co.uk/tax-articles/business-tax/is-that-settled-then.html)

Jeremy Vine

Which brings us to the new case of Jeremy Vine

Mr Vine appears to have been using his ten-year-old daughter Martha to avoid tax payments.

The presenter of the Jeremy Vine Show and the TV quiz Eggheads, has been funnelling cash through a limited company, Jelly Vine Productions, of which she is a shareholder.

Jelly Vine Productions had almost £810,000 in cash on its books in 2013 – the last accounts available, and £1million in 2012. 

Read more: http://www.dailymail.co.uk/news/article-2983593/Jeremy-Vine-daughter-10-shareholder-lower-tax-bill.html#ixzz3Z09xqmtO

The rules are clear on this and income given to children under 18 will be taxed on their parents so what did his advisers have in mind?
steve@bicknells.net

What if you change a dividend to salary 1

Stress business woman

Let’s look at the case of Richard and Julie Jones v HMRC [2014] UKFTT 1082 (5 December 2014).

They took a small salary and regular dividends from their recruitment company which was absolutely fine until the company got into financial trouble!

Their accountant (unethically but in an attempt to help their client) suggested they should re-write history and change the dividends to salary so that the liquidator couldn’t recall the dividends.

HMRC then decided to demand PAYE and NI and pursued Richard and Julie personally.

HMRC was refused the right to collect PAYE tax and NI due on the salary, not because the law didn’t allow it, but because it wasn’t possible for Richard & Julie to reclassify the dividends. They had been properly paid and the correct procedure followed. History couldn’t be rewritten and the dividends should have been changed to loans if the dividends were illegal.

steve@bicknells.net

Employee Shareholders – will your employees want shares? 2

Balance sheet business diagram

The Growth and Infrastructure Act 2013 comes into force on 1st September 2013 and Section 31 makes changes to the Employment Rights Act 1996 inserting section 205A Employee Shareholders.

205A Employee shareholders
(1) An individual who is or becomes an employee of a company is an “employee shareholder” if—
(a) the company and the individual agree that the individual is to be an employee shareholder,
(b) in consideration of that agreement, the company issues or allots to the individual fully paid up shares in the company, or procures the issue or allotment to the individual of fully paid up shares in its parent undertaking, which have a value, on the day of issue or allotment, of no less than £2,000,
(c) the company gives the individual a written statement of the particulars of the status of employee shareholder and of the rights which attach to the shares referred to in paragraph (b) (“the employee shares”) (see subsection (5)), and (d) the individual gives no consideration other than by entering into the agreement.
(2) An employee who is an employee shareholder does not have—
(a) the right to make an application under section 63D (request to undertake study or training),
(b) the right to make an application under section 80F (request for flexible working),
(c) the right under section 94 not to be unfairly dismissed, or
(d) the right under section 135 to a redundancy payment.

Giving up employment rights might not sound like a good idea for employees but there are tax advantages for both the employee and employer:

  1. Dividends are not subject to PAYE or National Insurance
  2. Dividends would not be used as Pay in Auto Enrolment
  3. Capital Gains Tax Allowances should make most gains tax free
  4. The employer will benefit from cost savings on the sacrificed employment rights

 

steve@bicknells.net

 

The Growth and Infrastructure Act 2013 was passed on 25 April 2013 – See more at: http://www.shepwedd.co.uk/knowledge/?a=5073#sthash.WVlFdcKS.dpuf
The Growth and Infrastructure Act 2013 was passed on 25 April 2013 – See more at: http://www.shepwedd.co.uk/knowledge/?a=5073#sthash.WVlFdcKS.dpuf

Things you need to know about Dividends….. 1

It can be illegal to pay dividends if:

1. There are insufficient retained profits to cover the dividend payments

2. Dividend payments may be illegal if the relevant paperwork has not been completed

You can download free templates from

http://www.contractorcalculator.co.uk/declaring_dividends_paperwork.aspx

HMRC are increasingly contending dividends and arguing that they are in reality earnings under the s62 ITEPA 2003 (salary sacrifice) rules and to persuade them otherwise needs proof that a set procedure for the declaration of dividends has been followed.

An example of a board minute is as follows:

Minutes of a meeting of directors of bloggs limited Held at 14 the road, london, ir3 5nl On 31 march 2005

Present: J Bloggs – Director

It was resolved that the company pay a dividend of £9,000 per £1 ordinary share on 31 March 2005 to the shareholders registered on 31 March 2005.

……………………………………
J Bloggs – Director

http://www.ir35calc.co.uk/dividend_documentation.aspx

Companies pay you dividends out of profits on which they have already paid – or are due to pay – tax. The tax credit takes account of this and is available to the shareholder to offset against any Income Tax that may be due on their ‘dividend income’.

When adding up your overall taxable income you need to include the sum of the dividend(s) received and the tax credit(s). This income is called your ‘dividend income’.

The dividend you are paid represents 90 per cent of your ‘dividend income’. The remaining 10 per cent of the dividend income is made up of the tax credit. Put another way, the tax credit represents 10 per cent of the ‘dividend income’.

Dividend tax rates 2011-12

Dividend income in relation to the basic rate or higher rate tax bands Tax rate applied after deduction of Personal Allowance and any Blind Person’s Allowance
Dividend income at or below the £35,000 basic rate tax limit 10%
Dividend income at or below the £150,000 higher rate tax limit 32.5%
Dividend income above the higher rate tax limit 42.5%

So the 10% tax credit offsets the 10% basic rate tax

Dividends are not subject to National Insurance.

Can you claim the tax credit if you don’t normally pay tax?

No. You can’t claim the 10 per cent tax credit, even if your taxable income is less than your Personal Allowance and you don’t pay tax. This is because Income Tax hasn’t been deducted from the dividend paid to you – you have simply been given a 10 per cent credit against any Income Tax due.

http://www.hmrc.gov.uk/taxon/uk.htm#5

Declaring dividend income on your Self Assessment tax return

If you normally complete a tax return you’ll need to show the dividend income on it. See income boxes 3 and 4 http://www.hmrc.gov.uk/forms/sa100.pdf

If you don’’t complete a tax return, but you have higher rate of tax to pay on your dividend income, you should contact HMRC.

Hope this is helpful

steve@bicknells.net