How can you pay variable dividends?

How can you pay variable dividends?

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Three consultants set up a limited company together but want to take different amounts out by dividend rather than salary. They are likely to change the ratio that they take dividends out in once or twice a year depending on how much work they have done through the company. How do you do it? (If you can do it!).
Ebenezer Scrooge

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By nick farrow
09th Feb 2006 13:25

Form 42
will the creation and allotment of new shares have to be reported on Form 42 as well and a valuation applied creating a potential tax charge on the recipient of the shares and a possible deduction in the corporate tax comp?

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By Ian Stewart
08th Feb 2006 18:41

Employment related securities
With regard to Matthew's comments does sec 447 only apply if the securities are restricted securities by virtue of the definition in sec. 422:-

"This Chapter applies to employment-related securities if they are–

(a) restricted securities, or
(b) a restricted interest in securities,

at the time of the acquisition."

This definition applies by virtue of 421B(8):-

"In this Chapter and Chapters 2 to 4A...."

and section 447 is in Chapter 4.

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David Kirk profile image
By David Kirk
08th Feb 2006 19:44

Complicated
I think that Matthew is half-right. We have a problem with some appallingly-drafted legislation and a circular definition of what is an 'employment-related security'. My previous comment only applied where the income might otherwise be taxable under part 2, as opposed to part 7, of ITEPA.

There is no statement in either ITEPA or ITTOIA as to whether part 7 of ITEPA takes ptiority over ITTOIA, but from the whole way that part 7 is redrafted I would expect it to. So does part 7 apply? Section 447 (which is in part 7) does if the shares on which the dividends are paid are an 'employment-related security'. We are referred to section 421B(8) for a definition of this, but this in turn tells us that they are 'securities ... to which chapters 2 to 4 apply', which takes us back to section 447, in chapter 4.

It is easier to see when it does not apply. This includes:

when there is otherwise a charge to income tax and no avoidance is involved (S. 447(4)) -this would be the case where the three consultants started off with the same class of shares and they were subsequently split (as long as that was not pre-planned);

in the case of a controlling shareholder, to dividends received by that shareholder - this would be the case if one of the shareholders had controlling voting rights.

David Kirk.

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David Kirk profile image
By David Kirk
09th Feb 2006 18:29

Just to add to the confusion, I do not think that the section 747 charge gives rise to any charge to national insurance. This is still based on the broad definition of 'earnings'; the Treasury has power to include it in regulations but as far as I can see has not done so.

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By Malcolm Veall
10th Feb 2006 15:01

Authoritative Comments Please
This ground has been covered more than once on AWeb since ITEPA rewrote these rules. There is clear divergence of opinion, and certainly divergence of practice with alphabet companies, (even if only A/B shares), still common.

It is common for entrepeneurs who find themselves working together to want to move to a combined corporate structure, for non-tax driven reasons. The rules seem to say that they can keep the small director's remuneration, draw the rest as dividends model as long as they are the only person involved. If there are more than one of them then s447 seems to insist that they extract any profits as employment income unless they are prepared to share all profits evenly, (s449(1)(a)).

Is it inappropriate to ask Mr Newth to comment?

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By User deleted
07th Feb 2006 08:12

Share classes
It can be done by having three classes of shares - A shares, B shares and C shares with separate dividends declared on each

The articles would need to define the rights of each shares, but the question of a dividend is essentially one for the directors.

The Revenue seem to be getting more interested in this - for example the CT41G now asks for a copy of the M&As "particularly if there is more than one class of share" - and it could be interestig if there is a written agreement that dividends on A shares are linked to billings of that shareholder.

We've got one company with this structure, set up by solicitors, but the only used so far of the different classes is on timings of dividends - one was happy to have the divi on 31 March, but the other was declared on 10 April. Can't think why! ;-)

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David Kirk profile image
By David Kirk
08th Feb 2006 15:10

Disguised salary
It will be interesting to see whether the Revenue attack this as being disguised salary. I do not think that they can, because of section 716A of ITEPA. This states that where income can be taxed either under ITEPA (as employment, pension or social security income) or under ITTOIA (as dividend income) then it is taxed under ITTOIA.

David Kirk, MA, FCA, ATII
[email protected]

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