Split of dividends

Split of dividends

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A newly formed Limited Company client has 2 directors each holding 1 share each. They intend to take equal salaries and dividends.

Each director wants to take out a total of £2,500 per month.

My intention was to give them £600 per month salary, plus a further £1,900 in monthly dividends.

However, Director 1 has children and wishes to make use of the childcare voucher scheme. My immediate thought was to increase Director 1 salary to say £843 or thereabouts (so still not paying any tax) and the remaining £1,657 as dividends. Director 2 would get the usual £600 salary plus £1,900 dividends.

The problem is how do I issue different levels of dividends when they each hold 1 share? I assume that you cannot waiver part of a dividend?

My alternative solution was to issue a Class A share to Director 1 and a Class B share to Director 2. I then have the flexibility to issue different dividends to each shareholder.

Are there any potential problems associated with the above? Or does anyone have any alternative solutions?

Many thanks,

Replies (6)

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By JCresswellTax
23rd Feb 2012 09:27

Are you the company secretary?

I don't understand why you would be issuing dividends?

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By petersaxton
23rd Feb 2012 10:28

Profits?

Have you considered the level of profits?

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By Paul Soper
23rd Feb 2012 11:09

A & B

Even if you issue A&B shares it won't give you the power to declare different dividends unless the power to do is reserved for each class of shares (see the Patmore case where exactly this mistake was made.  Basically you can't have it all ways round.  The childcare voucher scheme is often linked to a salary sacrifice but this has to be genuine, increasing someone's income to allow them to then sacrifice the increase would not be genuine.

 

Surely the issue is what they take out of the company, they are already taking a very low salary and taking dividends which as basic rate taxpayers mean they are in effect tax exempt.  You need to stress that there is no benefit in this situation in taking tax free childcare vouchers when what they have is already effectively tax free, childcare vouchers are fine for someone who is paying tax and NIC, they aren't and any attempt to get round this is pointless and introduces needless complications.

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By petersaxton
23rd Feb 2012 12:36

Tax free!!!!

People see "tax free" and get excited and all common sense goes out of the window.

I'm sure I could advertise "tax free self decapitations" and I'd get a queue a mile long.

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By JCresswellTax
23rd Feb 2012 17:05

Corporation tax relief

Paul - only real benefit is CT relief for the company, £243 x 12 x 20% = £583.

Some may view this as worth the hassle, even taking into account the additional costs involved in running the scheme.

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By Paul Soper
24th Feb 2012 14:56

Corporate relief?

The problem is really the position between the two participators - HMRC sees salary as having 3 elements - cash, taxable, benefits, taxable, exempt benefits not taxable.  You client wants to exchange dividends for salary which means that the interest of the two participants are not equal.  He should exchange his salary for the vouchers, which will have no effect on him as he is already not taxable, and will not increase the relief for the company, his total deductible extraction will be the same, and then parity will be maintained in dividend terms.

If he takes a reduced dividend in exchange for the vouchers, which seems to be the proposal could you then argue that the payment of the vouchers is for the purpose of the trade - it is as part of remuneration, it isn't as a benefit to a participator.

What is more important?  Equity between the participants or the illusory tax deduction?  Perhaps you should seek an equivalent tax exempt benefit for the other - a contribution into a pension policy of a like amount which would preserve parity.

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