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Is the minimal salary / top up with dividends actually allowed?

I'm a small freelancer accountant & have just taken on my first contractor client. He has set up a limited company and just started work on his first contract. I have explained IR35 implications to him, although the agency he got the contract through has assured he won't be caught by IR35 with this contract. He is going to submit his contract to HMRC for an opinion anyway, just to be sure.

In the meantime, he has registered as an employer & is wanting me to set up his payroll for him. Assuming that he isnt caught by IR35, is it really still acceptable to set up his remuneration as minimal salary (eg below PAYE / NIC thresholds) and pay the rest as dividend? I was under the impression that this is frowned upon by HMRC..... I also have an old work colleague who does a lot of contractor accounting & says that this is the norm - virtually all contractors pay themselves a minimal salary & top it up with dividend each month.

Am I being daft / too cautious to advise that my client doesnt do this, or is is perfectly acceptable to HMRC for someone to pay salary so that it just falls below PAYE / NIC threshold, then declare legal dividends (with all accompanying paperwork) each month?

Is it advisable to pay below PAYE / NIC threshold but ABOVE the LEL so as to trigger pension credits?

Any advice much appreciated.....

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As far as I'm aware and concerned what you suggest is perfectly acceptable.

As long as the dividends are declared correctly HMRC, while they probably don't like it, can't do anything about it.

Personally I wouldn't be surprised if, in the future, a chancellor decides that NI is payable on dividends from close companies or something, but until that happens, what you propose is perfectly OK and sensible

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A few points here

Never ever submit a contract for IR35 to HMRC. There are plenty of examples when HMRC have been less than impartial and will alway err on the "caught" side. Your client will put his head above the parapet by doing so.

Secondly, agencies are not in the position to determine IR35 status. Get you client to have the contract vetted by professionals in this field .... or better still, get him to join the PCG and get the use of validated contract templates, advice and insurance in one go.

 

Lastly, with regard to dividends, as long as the law is observed, this is not an issue but beware that HMRC target those who operate in this way and RTI will make it much easier for them to do so. Head above the parapet again.   

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What HMRC may like and dont like, and what is the tax law are two different and distinct things.

Every single one of my limited company clients does this btw.

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Slight twist.. I have got afew similar clients and I queried this with HMRC. Cutting a long story short, I was told that by doing this, you are in effect paying a higher monthly salary, thus prone to tax and NI irresective of a top up dividend. The concept of a top up dividend is just to try and disguise the payment to avoid the taxes. My understanding is that in these cases, HMRC can wack the client with backdated taxes. What can be done is a dividend resolved and paid every so often but to do it monthly was not acceptable as it then resembles a salary. With my clients, I try to make them manage the finances so that they pay themselved the monthly min wage, and then pay a big dividend to last 6 months which they manage via a personal account. This way, there is dividend issue paperwork (div voucher and director res).

The option of paying a dividend, putting to directors loan account, and slowly releasing each month was deemed risky.

Bear in mind that this was told to me by a HMRC inspector so clearly their opinion would be HMRC focussed. But the logic in what they said did kinda make sense to me. :(

However, I did use it to my advantage as a revenue generator as now, I do a set of mid year accounts for the clients, prepare the dividend vouchers, resolution notes etc and charge the clients. And in effect, there is 50% less work at year end.

Anyone else, please correct me where I have gone wrong....!

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Thanks for all your replies.... khalm0's post is exactly what I'm worrying about... whilst it seems that practically everyone does the monthly salary & dividend top up, it appears that HMRC don't like this as the monthly div top up is deemed a salary so an HMRC inspection would result in a back-dated tax bill (and an angry client!)

I'm not sure if you could argue to HMRC that 'everyone does it' so if they came after one person then they should go after everyone. I don't know what advice to give my client with regards to drawing salary / divs etc...it doesnt seem professional to say 'do it like this (i.e. monthly salary / div top up) because that is how everyone does it, oh but HMRC don't really like it so may come after you for back-dated taxes'. Has anyone had an inspection and this happen to them? would be interested to know how frequently an HMRC inspection results in such an outcome.....

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PA Holdings

Although some commentators believe that HMRC will not apply PA Holdings to small companies with straightforward salary/dividend arrangements, the risk is there. Of course, HMRC would need to take each and every case to Tribunal to be decided on its own merits so I can understand the doubt that this is likely to happen. More probable, IMHO, is new legislation to deal with the taxation of small company dividends. Then again, such legislation already exists, but again HMRC appear reluctant to use it. For the time being, then, it's as you were (and provided the paperwork is in order, I'd have no probem with monthly dividends).

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we do this too for our clients.  i am glad you posted this cos i always did it with a slight fear of "is this really ok". but yes, what hmrc like/dislike is separate to tax law.  so for now, im happy to continue but i expect law to come in to sort it all out.  it will be good when they do, cos at least there will be no more grey area!

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exactly how much do you pay.....

IMBS - out of interest, how much do you advise clients to pay as a monthly salary? Do you go below personal allowance and below the primary threshold of £146 p/w for NICs, but above the LEL of £107 p/w (so as to trigger pension credits)? So anywhere inbetween £107 to £145 p/w?

 

Sorry to ask - I'd just like to know how others set the weekly/monthly wage level. Also, if you do go below PA & NIC limits (but above LEL) does the limited company need to register as an employer? My client has registered as employer but i'm wondering whether he actually didnt need to after all.....

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I think the bigger problem is ...

... dividends on shares that have no voting rights (alphabet shares) used as a way of avoiding NI on employee bonuses. If all shares carry full rights pari passu then the risks are low.

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Dividends

Remember that dividends can only be paid from distributable profits. So long as you can prove that accounts have been prepared (management accounts suffice) and all  liabilities recognised then dividends can be paid at any time, annually, quarterly or monthly. As previous comments have suggested HMRC may not like it but the tax laws are the tax laws.

For my clients who take a monthly dividend I ensure that proper management accounts are prepared, board minutes issued and dividend vouchers raised so that there is a clear audit trail. Then there can be no question about directors loans or salaries.

 

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Hertsaccountant is right

hertsaccountant wrote:

For my clients who take a monthly dividend I ensure that proper management accounts are prepared, board minutes issued and dividend vouchers raised so that there is a clear audit trail. Then there can be no question about directors loans or salaries.

Exactly the same as I do.  Some clients pay me for monthly management accounts and dividend paperwork.  For others who are generally quite good at keeping VT cashbook up to date (and properly!), I talk them through a simple spreadsheet and let them do it themselves.  The spreadsheet template is one I set up myself which allows for a contingency and upon certain fields being completed it will churn out the board minutes and dividend voucher ready for signing too.  I usually do the first one with them then check the next one.  After that, if they are competent they do it themselves.

I do usually explain though that HMRC don't like it but as the law currently stands it is not illegal so they can't do anything.

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Hi guys, fair point to hertsaccountants that monthly management accounts are done so u pay the div monthly and the evidence of profitability is there. However, if your client does not pay for the monthly accounting service, then would you still process a monthly dividend? As without the man accs, you wont have the required evidence.

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I was going to ask exactly the same things khalm0 - I'm not doing monthly mgmt accounts for this client. I guess, if HMRC investigated, it wouldnt be too difficult to put together some monthly mgmt accounts - its not like he has masses of expenses going through the company, so its probably just one piece of income per month & then a few expense receipts and the salary to get to a profit figure. An excel spreadsheet could do the job....

 

However, if you have clients doing lots of transactions, I guess it could get difficult putting something together at a moments notice for an inspection...

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Backdating is a no-no in my book

southgirlaccountant wrote:

I was going to ask exactly the same things khalm0 - I'm not doing monthly mgmt accounts for this client. I guess, if HMRC investigated, it wouldnt be too difficult to put together some monthly mgmt accounts - its not like he has masses of expenses going through the company, so its probably just one piece of income per month & then a few expense receipts and the salary to get to a profit figure. An excel spreadsheet could do the job....

 

However, if you have clients doing lots of transactions, I guess it could get difficult putting something together at a moments notice for an inspection...

You can't just put the accounts together after the time, to be valid it has to be considered at the time the dividend is declared. You wouldn't want to get caught back-dating things.

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We have two separate issues here ...

... potentially illegal dividends and a dividend/salary argument!

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