Client wants a structure that rewards the three individuals, (who are each putting in significant sums), to reflect the level of time commitment they will each put in to running the business. Balance of profits above this level to be pro-rata to shareholdings.(They are planning to have a shareholder agreement).
To be able to extract these profits as dividends is this better done via different classes of shares with voting ordinaries to take the balance of profits, or by a single class of shares with dividend waivers?
Can the obligation to waive some dividends be put in place via the shareholder agreement?
How likely is a HMRC challenge to the "alphabet" share dividends as emoluments? Is the situation differentiated from a PAYE evasion scheme because the individuals will all be investing significant funds?
Malcolm Veall
Replies (15)
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I think this correspondnece should now close !!
In the case of 'one man' companies, there is typically only a single class of shares; IR35 is an issue , of course, in many cases.
I think this correspondence should now close !!
Martin- I wish I could be as confident as you are
Without commenting on 'Red Dawn', whose opinions on other matters is contentious to say the least, the Revenue are not going to be bound by some vague expression of intention if they see what in their view is a tax 'plan'- given that in their eyes planning, avoidance and evasion are three sides of one coin-geometry was never my strong point!!
Malcolm- we don't agree on the ITEPA issue
becuse s 431B is not within any if the sections covered by s 716A.
You are very optimistic if you think you can rely on ministerial assurances as to the purpose or philosophy of legislation, Pepper v Hart notwithstanding.
The purchase of individual members' interests in the LLP is the equivalent of giving incentive shares to employees , but without any of the ITEPA problems.
The terms of the LLP can for example provide for the purchase in due course by the company , as a member, of other members' interests.
Malcolm, ,Alphabet shares don't escape Sch e/NIC and why are me
The Board of the company are certainly not likely to be persons in accordance with whose instructions the directors are accustomed to act.
Since 2nd December 2004 the effect of ITEPA s431B will impose Sch E and NI on the arrangement, as will FA (no2) 2005, Sch 3 Part 4. , so the anticipated tax savings of an alphabet scheme are illusory .
I was wondering why llps are better for NI than limited companie
This comment had me wondering also, as I had thought previously that NI for llps was the same as for non limited partners.
With limited companies I always use alphabet shares rather than waivers, as I seem to recall that waivers are supposed to be drawn up by a solicitor to be effective (I know this doesn't happen on lots of occasions), and are therefore more complicated to deal with.
Dividend waivers are a nightmare........
and should be avoided wherever possible. In particular the Revenue take the view that, if the whole dividend ignoring any waivers could not have been paid out of the then available profits, the waiver is ineffective.
Alphabet shares still work fine - but you need to understand the "newish" ITEPA legislation and ensure you are able to get around it. Not actually very difficult.
I don't buy the LLP route - overall tax costs will be significantly greater that way up to £300k of profit. After that there's hardly anything in it.
LLP's and NI; ITEPA
The NI issue relates to all 'benefits'; the LLP addresses as well ITEPA issues for share incentives.
It can pay in terms of such items as car benefits, for example, but more importantly in terms of avoiding the Sch E rules for share incentives.
The typical model is a combination of a trading company and an LLP of which it is a member.
The traders[typically] enter ito an LLP arrangement with the trading company, but are neither employees nor directors of it.
The LLP conducts the trade.
They can also co-invest with the trading company in other ventures, as they are employees of none of the companies concerned, again ITEPA does not apply.
The interests in the LLP can then be bought out in due course by the trading company; the bought out members will suffer only 10% CGT after BATR, rather than Sch E and an NI liabilty for the company. The company will of course have to use tax paid money to fund the purchase, but for the traders this is a much better deal.
Cost comparison.
Company spends £100 to buy out shares in a conventional alphabet scheme, employees suffer IT at 40% . company pays 12.80% NIC.
Net cost to company is 70% of £[100 +12.80]=£78.96, shareholder banks £60.
LLP route.
Company spends £78.96, member pays 10% CGT, net to member £71.06, 18.4% more.
The downside is that the Revenue may close the 'loophole' if they perceive it to be egregious.
Why not use an LLP?
You can write the terms any way you want-there is no ITEPA issue, and the NIC and benefit costs for the time being are much more favourable than for a Ltd.Co.