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Alphabet shares and retained profits

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Family company with shares of different classes but equal rights being held by parents and daughter.  Company wishes to pay differing dividend levels to reward relative work done in the company.  HMRC gives an example suggesting sufficient profits should have been available to have paid the higher dividend rate to all classes, we are having some debate as to whether cumulatively there should be enough retained profits to have paid the "equal"  dividends year on year.  I.e. do we need to track individual pots of dividends not drawn, as if those dividends had been waived.

If anyone can point me to a definitive answer or resource on this I would appreciate it.

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By johngroganjga
21st May 2020 15:51

Is the HMRC guidance you refer to not about when dividends are waived?

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By Dp2020
21st May 2020 15:57

I was looking at this example on https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-...

Example 13 - dividends on certain shares

As in example 1, but in this case Mrs I owns A shares and Mr I owns B shares. Both A and B shares rank equally. Again profits of £25,000 are made and a dividend of £20,000 is voted on the B shares while no dividend is voted on the A shares.

Clearly by not voting dividends on the A shares (which rank equally with the B shares) this is a bounteous arrangement as the dividend paid on the B shares could only be paid if no dividend was declared in respect of the A shares. £16,000 of the dividend paid to Mr I is attributed to Mrs I under ITTOIA/S624 because the decision only to vote dividends on certain shares was a bounteous arrangement.

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Replying to Dp2020:
By michaelbeaver
21st May 2020 16:43

In this example there are two different classes of share, but 'both rank equally', implying that directors do not have the right to declare dividends for one class to the exclusion of the other class. In this case it will effectively be the same as a dividend waiver.

If the rights attached to the shares are such that the directors can declare dividends of different amounts to the exclusion of the other classes, then the rights are not 'equal', and the dividend waiver process isn't used.

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Replying to michaelbeaver:
Psycho
By Wilson Philips
21st May 2020 18:31

It will depend on what the Articles say.

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By PandoraSleeps
21st May 2020 17:08

Surely salaries are paid to reward work done, not dividends.
If HMRC do decide to take the point, if dividends have been calculated in this way as payment for work then they may assess for PAYE.

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Replying to PandoraSleeps:
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By Tax Dragon
21st May 2020 17:19

That'll ruffle some feathers in here.

HMRC thinks that salary rewards work and dividends reward investment; around these parts salary is used mainly for clocking up NIC years and reducing CT.

If HMRC follows your suggestion (could it?! what legislation are you referring to?), it could be one way to pay for coronavirus support measures - the tax dividends could be huge.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
21st May 2020 18:33

P A Holdings

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Replying to Wilson Philips:
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By Tax Dragon
22nd May 2020 15:04

There's a discussion to be had about that, certainly. The idea of prompting it to happen here lay behind my question, but it's probably a bit outside the scope of Any Answers, so I'll leave it where you've left it.

Another possible grey area (probably also outside the scope) is whether dividends can be taxed under the ERS regime as post acquisition benefits.

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Jennifer Adams
By Jennifer Adams
21st May 2020 19:08

See this article for the answer:

Alphabet shares: Get the details right.

https://www.accountingweb.co.uk/business/finance-strategy/alphabet-share...

"HMRC may also seek to apply the settlement rules where the amount of dividend paid on a particular class of share could not have been so unless no (or minimal) dividends were paid on the other classes of shares. For example, if the dividend can only be paid if one class of shares receives no dividend; then this may fall within the settlement legislation as a “bounteous arrangement”. (TSEM4225)".

PS>> dont be put off by the date of the article - the text is still valid.

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Replying to Jennifer Adams:
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By Dp2020
22nd May 2020 16:23

Yes, so what I’m asking is do the profits need to have been there at the time to have paid the dividends at same rate, or do you need to track those profits over the years of the company so each shareholder effectively has a pot of undrawn dividends, similar to waivers

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Replying to Dp2020:
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By Matrix
21st May 2020 19:49

Your interpretation of waivers is incorrect. There have to be sufficient distributable profits to declare a dividend on all shares but any dividends waived are put back in the pot for all shareholders - these profits are not ringfenced.

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Replying to Matrix:
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By Tax Dragon
22nd May 2020 15:08

Matrix wrote:

Your interpretation of waivers is incorrect.

Well, that's one view, though IMHO it's far less clear than you suggest.

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Replying to Tax Dragon:
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By Matrix
22nd May 2020 16:20

OK but I have never seen shares designated so that waived dividends are ringfenced for future distribution on solely those shares where the dividends were waived? Sorry can’t express myself succinctly today. Or any day really.

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Replying to Matrix:
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By Tax Dragon
22nd May 2020 16:34

OK got you... but that wasn't what the OP meant (as I read it). I think it was a tax question (application of settlements rules), not a legal one (if that's how you've read it).

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Replying to Tax Dragon:
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By Dp2020
22nd May 2020 16:42

Correct , I'm just looking for some guidance about avoiding settlements rules on paying differing dividends on alphabet shares over a number of years, whether having the sufficient profits to pay them in one year or over all the years at same rates is necessary etc

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Replying to Dp2020:
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By Wanderer
22nd May 2020 16:48

& how are you addressing the issue Wilson subtly makes and I unsubtly attempt to reinforce?

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Replying to Tax Dragon:
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By Matrix
22nd May 2020 16:45

OK thanks I thought the OP was talking about keeping an undrawn pot of waived dividends. But I agree that I was looking at the legal/accounting side and not the tax side so will leave others to it.

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By Wanderer
21st May 2020 19:25

Dp2020 wrote:

Company wishes to pay differing dividend levels to reward relative work done in the company. 

Jeese, at least make some effort!
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