I am currently doing the books for a small engineering company. It is a limited company with two owners (50/50 share split) and several workers. The client wants to purchase a house and wants to declare the highest dividend possible on their Dividend declaration in order to qualify for a mortgage and then withdraw less to minimise income tax on their SA. I have said that if you declare a dividend then you are taxed on the amount you declare. Am I correct? Or can you declare a dividend, withdraw less then only input the amount you withdraw on your SA return. What view will HMRC take of this? And can you then withdraw the un-withdrawn balance of the dividend in another year? Your responses would be appreciated as the customer thinks I am just being obstructive. Thank you.
Replies (44)
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Declared is income
Declared dividends are taxable income, and reportable on the tax return as such. It does not matter if they take all, some or none. Heck, they could even actually put money into the company instead. If a dividend is declared then it is all taxable income for the director and any undrawn amount is a creditor within the company. This can be taken out of the company at any later date without further tax consequences.
As mortgage providers are currently seeking SA302s a lot, which reflect what is on the return, declaring a lower amount on the return would likely not even achieve the desired effect anyway.
You are correct
The dividend voted is the amount which needs to be declared on the SA return. If the shareholder chooses to leave some of the dividend on loan to the company that is fine but it does not reduce taxable income.
Edit: beat me to it but good point on SA302's
Agree with above
Once you declare a dividend it's your money and you need to show it on your tax return.
You are absolutely entitled to leave the money in the company if you wish - but you're still taxed on it on the date it was declared payable.
Mortgage Company
I'm not sure that the mortgage company would be taken in by an exceptional dividend anyway.
They're only interested in the past as a guide to the future.
If this is correct, then it is only correct for a final dividend
And not an interim dividend (where there is no contractual obligation to make a payment) and even then, please can someone post the specific case law or legislative justification for this, as it would seem contrary to the guidance in the link below:
Puzzled
And not an interim dividend (where there is no contractual obligation to make a payment) and even then, please can someone post the specific case law or legislative justification for this, as it would seem contrary to the guidance in the link below:
Don't understand your question. The OP has asked whether a client can declare a high dividend figure for mortgage purposes and a smaller figure for tax purposes, provided the difference is left on loan to the company. In what circumstances do you say that is permissible?
Misunderstanding
In the context of the link, interim dividends are dividends actually paid out during the course of the year. They should be properly minuted and recorded regardless. Also "paid out" includes a credit to a director's current account. Any declared dividend is a contractual obligation, because the declaration is a legal statement of that obligation. And not an interim dividend (where there is no contractual obligation to make a payment) and even then, please can someone post the specific case law or legislative justification for this, as it would seem contrary to the guidance in the link below:
As John has already pointed out, this is completely irrelevant to the OP. They are talking about declaring a dividend (creating a contractual obligation) but reporting less on the return by not fulfilling that obligation at the same time.
Yes; you may have misunderstood my question
It seems perfectly permissible to declare an interim dividend and not pay it and show it in the accounts as payable and not declare it in the individual's tax return (see link below). Also, as you have posted no authoritative justification for your view above, it would seem that someone who does not bank a final dividend cheque does not need to declare it in their tax return (yet that dividend will have been shown in the accounts). Please post anything authoritative to the contrary to show that I am wrong here (I am very happy to be proved wrong). Re John’s confusion, a dividend figure in the accounts is obviously a higher figure than a nil dividend figure in an individual’s tax return.
https://www.accountingweb.co.uk/anyanswers/uncashed-dividend-cheque
Date of a dividend
http://www.hmrc.gov.uk/manuals/saimmanual/SAIM5040.htm
So if an interim dividend has been declared and the date of the dividend has passed, it is enforceable so should be included in the individual's tax return.
The section referred to in Jason's post above is looking at the situation from the company's perspective rather than from the recipient's perspective, and also deals with ACT, and payment of ACT on uncashed dividends, which is another issue entirely. From memory ACT was abolished in 1999 so this page is a little out of date.
Taxhound is wrong
An unpaid interim dividend is not "enforceable" by the shareholder for the reason given above (as it is not a formal debt owed by the company to the shareholder).
The question was: "Can you declare dividends and not withdraw them" and you certainly can in the case of interim dividends.
Not the whole question
The thrust of the question was "can you declare a big dividend to impress the mortgage company but not pay any tax on it by not drawing in out of the company ?"
Unless someone proves otherwise
It seems that the answer is "yes" and if necessary the tax return could be amended later to show the dividend was not paid (or not banked). This should not be done deliberately of course.
Good luck
It seems that the answer is "yes" and if necessary the tax return could be amended later to show the dividend was not paid (or not banked). This should not be done deliberately of course.
Well, good luck with that one and also the ensuing prosecution for obtaining money by deception.
Prove yourself right
A dividend declaration is an announcement that a dividend is to be paid. How is that not an enforceable obligation? Nothing you have linked to says otherwise. At best the HMRC link you started with talks about interim dividends being "decided". This covers the position where directors and shareholders are different and the decision by the directors has not been communicated.
You are saying that someone who has not banked a dividend cheque does not need to declare it. The thread you linked to says nothing of the sort. The company still records the dividend as a payment and the balance as money owed (either a creditor or reduced bank balance).
If I invoice a company before my year end, but you have not paid then I would declare the income as sales with a trade debtor. The company will record it as a payment and a creditor. I account for the sale as taxable income and you record it as an expense. You are saying that dividends treated in the exact same way in the company accounts is treated on a cash basis for the recipient. Please post something proving this different treatment.
I think it is up to you to support your view
With some authoritative justification. The fact that you have not supplied any suggests that you are wrong. For example, if a £5 dividend cheque goes stale after 6 months or if my dog eats it (so that I cannot bank it), I don't see why I should put that in my tax return, especially if the company reverses it in due course (due to it not being cashed).
I suggest you "Google" re the difference between interim & final dividends, as that is very basic stuff and you will see that I am right re the interim dividend obligation/debt point.
I fear that you are missing the point, Justin
The moment that the dividend is credited to the loan account interim or final, then it is paid. End of story.
Accepting your argument that the company may instead declare an interim dividend and provide for its future payment in the accounts (I didn't think that companies could do that any more?) then the individual would have no right to include it in his statement of dividends received.
As for the suggestion that one would not report a dividend just because the voucher is still sitting in the desk drawer (or indeed in the dog's stomach) - sorry, but I consider that to be absurd.
Thairwall v Great Western Railway (1910) 2 KB 509
lionofludesch: This should not be done deliberately of course
As I very clearly stated above (and I note that you included in your quote and yet totally ignored) and see above the dog eating cheque example - which could happen to anyone.
Lost the plot
As I very clearly stated above (and I note that you included in your quote and yet totally ignored) and see above the dog eating cheque example - which could happen to anyone.
I'm afraid that you have drifted far too far from the original question.
HMRC to the rescue
Please follow the link :
http://www.hmrc.gov.uk/manuals/ctmanual/ctm20095.htm
Pick the bones out of that!
Who said it is credited to a DLA?
And a shareholder need not be a director. What if the dividend gets lost in the post? Would you declare it in your tax return then? No-one has posted anything authoritative on this to support that view, so it seems that I am correct. It also seems that you could tear the dividend cheque up as an act of waiver (similar to how tearing up a will will revoke it).
Oh come on now...
You cannot delay and defer the timing of dividends based on if you 'bank a cheque' or not. The concept of wavier in that manner is also very questionable.
I have emboldened relevant sections
***********************************************
SAIM5040 -
When is a dividend paid?
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’. This rule does not apply to dividends of an authorised unit trust, for which a separate rule is specified.
The date when a final dividend becomes due and payable is usually established by a resolution of the company. The dividend becomes due when the date on which it is expressed to be payable arrives. Only then is payment enforceable. In the case of a final dividend where a date for payment is not specified, an immediately enforceable debt is created so that the date of declaration of the dividend is the due and payable date.
An interim dividend can be varied and rescinded at any time before payment and can therefore only be regarded as ‘due and payable’ when the date for payment arrives.
The main case law authority for the above propositions is Potel v CIR (1970) (46TC658) which particularly indicates that the declaration of a dividend by a company and its payment are two separate matters.
**************************************************************
As far as I was aware there was no argument as all final dividends either specify a payment date or are immediately payable. All Interim dividends are variable until paid or finalised at the next General Meeting. If finalised normal payment rules kick in.
Failure to cash a dividend cheque does not cancel the liability to tax on the income - indeed even payment of charges for the reissue does not reduce the taxable amount either.
Tearing a dividend cheque up ...
... is not an act of waiver. A legal waiver needs to be in place before the dividend entitlement arises. As for an authoritative view, relevant case law has been cited several times.
There are differences between interims and finals
My understanding is that the tax treatment stems from the company law (statute and case) position. If you read the following you'll see where HMRC are coming from in their manuals.
Final dividends - usually must be approved by shareholders. This is a normally a standard requirement in the articles (art 30 of the model arts for a Ltd not a PLC and reg 103 for companies adopting table A under the 1985 Act). Once approved they are treated as paid on the date they are specified in the proposal, or where no date is specified, the date they are declared (that is approved by shareholder resolution). Between declaration and payment they are a debt owed to the shareholder.
For tax purposes - they do not constitute income while they are a debt (the position is not comparable with say, a trader who has issued an invoice for work done and is owed money - in) instead they count as income on the date they are payable regardless of whether they are drawn by the shareholder or not.
Other dividends - (interims or specials) can usually be authorised by the board (see the same articles etc as for final dividends) without shareholder approval. This is important because there is not there necessarily two stages; declaration and payment, as for final dividend. In other words an interim dividend can just be paid. It is this difference that results in a potentially different tax position.
For tax purposes - where an interim is proposed by a directors resolution it is not declared and so does not create a debt because they (the dividends) can be withdrawn by the board (Lagunas Nitrate Co Ltd v Schroeder &Co). Therefore until the proposed dividend is paid it is a nothing. However once paid, and this will include crediting to an unrestricted loan account, it is wholly taxable whether or not the shareholder decides to draw it.
EDIT: sorry things moved on quite a bit since I started putting this post together - but I think it still has relevance
Waiver
of a dividend is only effective for tax purposes if made in advance and in ignorance of the amount due. I fail to see how tearing up the cheque meets those criteria.
Continually stating that you must be right because no one has replied authoritatively (?) does not make it so and the necessary rebuttal is so widely based that it would take far longer than is warranted on this forum.
The above HMRC links
Expound on the CT (and ACT) aspects; not the IT aspects. In any event, they confirm that I am correct re unpaid interim dividends not being taxable at least (which was always obvious as noted above).
I don't think there is any case law on this specific IT point, but I would be very happy to be proved wrong.
Lost the plot completely
The case law cited discusses when a dividend is paid - whether it is for IT, CT or some other purpose is irrelevant. "Paid" is "paid". I don't think anyone would argue that an unpaid (interim) dividend is not taxable - what you appear to be struggling with is what constitutes "paid". A dividend warrant inside a dog's stomach is paid, whether you like it or not.
Made me laugh!
thanks BKD,
I agree, but on a lighter note your comment conjured up the image of a bloke strolling into his bank and saying to the counter clerk - "I'd like to deposit this dachshund in my savings account please - Oh! and while I'm here can I withdraw that golden retriever paid in the other day" or bloke goes into a pub and buys a pint and asks the barman - "have you got change for a spaniel"
Think I've lost the plot now!
But you have not cited anything
Authoritative for that view specifically in relation to income tax (I accept the company law and corporation tax/ACT "paid" analysis and never argued with that). I am glad that you agree with me re interim dividends (it is surprising how many people do not). What if the postman stole and banked the cheque? What if they got your name wrong on the cheque and you cannot bank it etc. etc. I could go on and on with valid examples, but I will stop there until someone posts something authoritative on this - specifically in relation to income tax.
Garbage
Authoritative for that view specifically in relation to income tax (I accept the company law and corporation tax/ACT "paid" analysis and never argued with that). I am glad that you agree with me re interim dividends (it is surprising how many people do not). What if the postman stole and banked the cheque? What if they got your name wrong on the cheque and you cannot bank it etc. etc. I could go on and on with valid examples, but I will stop there until someone posts something authoritative on this - specifically in relation to income tax.
If the postman stole your cheque, it's still your income. Just like you don't get a tax rebate if someone takes a tenner out of your wallet.
If they get your name wrong, it's still your income. You're the shareholder, you're entitled to the dividend, it's you that needs to get a fresh cheque.
You haven't come up with any valid examples - but please keep trying.
Authority
The issuing of a cheque or dividend warrant (in effect a cheque drawn by the company on its bank in favour of the shareholder concerned) renders a dividend ‘paid’ at that time. If the company's Articles so authorise, the sending of a dividend warrant by post will constitute payment and the company's liability will be discharged (see Thairwall v Great Western Railway [1910] 2KB509).
That's as much as you're going to get - from me. Now it's up to you to provide some authority to back up your own argument. If on the other hand you simply want to continue to argue that the above citation has no relevance to income tax - without anything to support your case - go right ahead - I'm not listening any more.
But is that right in all cases?
I think that case presupposes (for income tax purposes) that the cheque is duly cashed, because what if the company had £1m to pay as a dividend and wrote a cheque to the sole shareholder for £1m and before banking that cheque a fraudster at the company stole the £1m and caused the £1m cheque to bounce and the company to go bust. Unless someone posts something authoritative to the contrary, then I do not think the shareholder would have to pay income tax on the £1m (for the simple reason that he has not got any income on a purposive construction of the legislation) and my other examples above are all similar to this.
I note that for IHT purposes, a cheque must clear for it to be regarded as “paid” as a gift. See: Curnock (Curnock’s personal representative) v CIR [2003] SSCD 283 (SpC 365).
No valid examples or authority
Just hypothetical absurdities. "I think ..." and "I do not think ..." are hardly examples of solid support for one's argument.
to get to my earlier post 15.52 I started here
SAIM5020 - Dividends and other company distributions: the charge to tax on UK dividends etc.
Dividends etc from UK resident companies
The charge to tax on dividends and other distributions from UK resident companies is ITTOIA05/S383. Such distributions include amounts that would otherwise be treated as capital (a capital distribution may fall within the definition of distribution and therefore be taxed as income). SAIM5030 has more on the meaning of ‘distribution’.
The income charged is the full amount or value of the dividends paid and other distributions made in the tax year (ITTOIA05/S384 - subject to certain rules on share incentive plans - SAIM5080).
SAIM5040 has more on the meaning of ‘paid’.
This specifically relates to Income Tax and if you read the whole section it states that it follows the CT definitions of payment.
Would just like to reiterate lionfludesch's point above
We will clearly have to agree to disagree on this one and I wish you all the very best in your argument with HMRC.
Fraud
It is sad to see questions which are clearly about obtaining monies by deception, do these people not have any inkling of the mess they could find themselves in?
Hear hear
It is sad to see questions which are clearly about obtaining monies by deception, do these people not have any inkling of the mess they could find themselves in?
Hear hear
Final comment
Again, I am happy to be proved wrong. I have read SAIM5040 (which is not law), which merely states:
"The guidance there is aimed at the company’s obligations, but the discussion on when a dividend is paid, when it is due and payable, what constitutes payment, ultra vires and illegal dividends, and dividend waivers is relevant to the position of the recipient of the dividend."
That would not be enough for a judge to decide this matter for all situations I have raised (there are many others I could raise –see below) and is of little evidential value to the question (and the above merely uses the word "relevant", which is not a conclusive or definitive term anyway).
I think I am right based on a conversation I had with a couple of tax barristers yesterday. One barrister, Andrew Thornhill QC, said that he thought that there was a (possibly unreported) case from the 1970s (with Robert Venables acting for the taxpayer) where a taxpayer won on this point.
I think the answer is that if there is a sufficiently good reason for the final dividend being unpaid, then it won't be income taxable and it does not automatically follow that just because a final dividend is declared it automatically becomes income taxable for the relevant shareholder on the member’s register at the relevant time (that cannot be right anyway re bare trustees and if it was right then a bare trustee could potentially bankrupt (via an automatic tax liability) anyone in the world by doing a declaration of trust for another re shares he owns and simply not paying the dividend on to the beneficiary).
You are all of course free to take a contrary view with your clients, but if there is a lot of money at stake and a seemingly good reason for the dividend not to be subject to income tax you may wish to take a tax counsel's opinion to avoid the risk of being sued for negligence in case you are wrong.
Case Law
Is there any case law on whether feeding a dividend cheque to your dog constitutes a formal dividend waiver ?
I've wasted more than enough time on this ...
... but since it's Friday:
Justin - do you accept (as the rest of the world does) that the credit of a dividend (interim or final) to an unrestricted loan account represents payment of the dividend and becomes taxable at that point (at the latest)?
Obstructive?
Personally I'd be telling the client that what they intend to do is tantamount to fraud and as such I want nothing to do with it. I'd then tell him to take a hike, permanently. This isn't a case of a dividend being declared and later legitimately being cancelled, it's an attempt to commit fraud. Plain and simple. Kick them into touch before you end up with something unpleasant on your footwear.
I was wrong
That was not my final comment! Also I was wrong about the tax case being unreported. It is indeed a Robert Venables case; Parkside Leasing Ltd v Smith (H M Inspector of Taxes) [1985] STC 63 that I think shows that uncashed/unbanked/lost etc. interim dividend cheques are not taxable (the case is about interest receivable under Sch DIII, but the principle is the same I think). See also:
https://www.accountingweb.co.uk/anyanswers/question/dividend-payment-date#comment-708724
BKD of course I accept that the credit of an interim dividend to an unrestricted loan account represents payment of the dividend and becomes taxable at that point. That is trite law and I do not know why you ask therefore.
That was not my final comment! Also I was wrong about the tax case being unreported. It is indeed a Robert Venables case; Parkside Leasing Ltd v Smith (H M Inspector of Taxes) [1985] STC 63 that I think shows that uncashed/unbanked/lost etc. interim dividend cheques are not taxable (the case is about interest receivable under Sch DIII, but the principle is the same I th