RESTRUCTURING SHARE CAPITAL

RESTRUCTURING SHARE CAPITAL

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I have a client company who use a financial services person to look after the pension.
The company has four Directors - husband and wife with 72 and 20% respectively and two employee Directors who have recently bought 5% and 3%. the husband and wife have for a year or so taken most of their salary by dividend and paid themselves a minimum salary of about £5000.
This financial services person wants the salaries of all the Directors paid this way.
He wants the ordinary A shares to be reclassified into A,B,C,and D. The B shares will go to the wife, and the C and D shares to each of the other two Directors.
The ultimate plan is to pay the employee Director's salaries mainly as dividend saving the company the bulk of employers' Nat Ins which is not inconsiderable.

My concern arises from several things:
I have never come across this process before
I have great concern that this re-structuring will be seen as a sham by the Revenue and if is legal and allowable to do this, surely this restructuring will fall under the rules intruced by the Chancellor last year where such schemes need to be cleared by the Revenue in advance?
If this scheme is all proper and above board (and I must confess I would have some of my own moral issues with it) why is every decent sized company not doing this and why is the Revenue allowing a potential o% National Insurance on Directors.
FRANCIS KNIGHT FCA

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By kenmoody
06th Jul 2007 13:09

It's a high risk strategy ...
... and would be effective only be default (storing up potentially big problems for the future).

Husband and wife are probably OK at the moment as major shareholders, with the salary/dividend arrangements. However giving shares to employees is fraught with problems and tax isn't the only one.

Giving up existing salary in exchange for dividends is an obvious sham and I doubt that HMRC would have any difficulty in establishing that the dividends are disguised remuneration. Suppose the company doesn't have the reserves to pay dividends on the C and D shares. Are those directors going to accept that they don't get paid or are they going to demand salary instead. I'd have thought the latter so that effectively the dividends may become an implied term of the employment contract. Discretionary bonuses are a slightly different kettle of fish but even then are not free from difficulty. In the circumstances I'd expect HMRC to argue that PAYE should have been applied, so as I say they may be storing up big problems, quite apart from the employment law implications which are a minefield should all go pear-shaped.

Also, if you are replacing existing remuneration and the shares are issued on the clear understanding - and I doubt if your client can stand up in from of the commissioners and say otherwise - what are the shares worth. Shares with nominal value which attract whacking dividends would, on the face of it, be worth quite a bit, especially if the dividends commence soon after issue. Thus the employee would be taxable on the market value of the shares, and I wouldn't rely on SV applying the minority discounts that you might normally expect.

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By Euan MacLennan
05th Jul 2007 13:26

Suggestion
Alphabet shares and the extraction of pay as NIC-free dividends are a constant topic, particularly as we are currently waiting to see if the House of Lords reverses the Court of Appeal decision in the Arctic Systems case to allow the husband who earned the company income to settle some of that income on his wife by paying dividends.

Gordon Brown could have imposed NIC on dividends paid by close companies to controlling shareholders, but the suggestion is that he baulked at that and instead, accepted that dividends would continue to be paid instead of salary, but raised the small companies rate of corporation tax from 19% to 22% over 3 years to compensate for the loss of NIC.

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By AnonymousUser
05th Jul 2007 14:27

Take Advice
The most obvious difficulty with arrangements of this kind is sec 447(4) of ITEPA - if you are not up to speed on the IT/NIC/Reporting aspects of this sort of thing you should really be taking specialist advice.
Harry

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