HMRC's increasing focus on close companies has clouded the picture about what constitutes a settlement when share waivers are used. Jennifer Adams offers a simple-to-follow summary of the main technical requirements.
Dividends are paid at the same rate for each category of share in accordance with the number of shareholdings held. Such inflexibility could mean the distribution of profits not being made in the most tax efficient manner or produce difficulties for a shareholder who does not want or need the payment - a dividend waiver may offer the solution. How it worksThe shareholder voluntarily waives entitlement to their share of the dividend, allowing the distributable profits to be divided between the remaining shareholders in the proportion of their holdings. Scenario 1
ABC Ltd has distributable profits of £50,000 and wants to pay a dividend of £400per share; the shares are held by three brothers as follows:A 50 sharesB 25 sharesC 25 shares A can waive his dividend and B and C will receive £10,000 each with no matters arising; A’s dividend remains within in the company. Scenario 2
Same details as above with A waiving his dividend but B and C receiving an increased amount of £15,000 each (£600 per share). HMRC may challenge this waiver contending that A has settled £2,500 on each of his brothers and he will be taxed thereon on the grounds that an element of bounty is present. Although the actual total amount of dividend paid (£30,000) is less than the amount of distributable profit (£50,000), if A had not waived his dividend the company would not have had enough distributable profits to pay the increased £600 per share (£600 x 100 = £60,000). The full article covers:
- When will HMRC become interested?
- Tax case: Buck v HMRC 2008
- Tax case: Donaldson v McLaren 2014
- Specific technical points
- Other options?
About the author
Jennifer Adams FCIS TEP ATT (Fellow) is Associate Editor at AccountingWEB. A professional business author specialising in corporate governance and taxation, she has written for many of the leading specialist providers of legal, tax and regulatory publications. Jennifer runs her own accounting and tax consultancy business with offices based in Surrey and Dorset.