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Can dividends only be paid to some shareholders?

Can shareholders in a private Ltd company waiver their dividends?

Any answers appreciated.

A company has a share split of 40:60 between two non related parties.  The 60% shareholder wants to take fewer adhoc dividends as they are employed elsewhere.  The 60% shareholder has a higher interest in the company because it's their name and contacts which is bringing in all the work.

Can this be done by a waiver or alphabet shares.

The company has been trading just two weeks and no dividends have been issued at all yet, so still time to restructure the shares if needed.  The shares are currently all Ordinary A shares.

Many thanks.

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12th Apr 2019 13:19

The 60% shareholder needs to be taken away to a quiet place, be given a nice cup of tea, and be helped to think straight.

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to johngroganjga
12th Apr 2019 13:22

LOL. Really not helpful John but thanks for the advice, did make me laugh :-).

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By Matrix
12th Apr 2019 13:24

Any dividends waived are waived forever so why?

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to Matrix
12th Apr 2019 13:33

The 60% shareholder doesn't want to take as many dividends as the 40% shareholder, it's as simple as that. Can a waiver be issued with each payment of dividends leaving the profits in the company?

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to tanyajackson
12th Apr 2019 14:10

But why does he not want to do something that so obviously makes him better off.

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to johngroganjga
12th Apr 2019 14:50

Because they have another full time job but wants to retain control of the company whilst taking a small dividend. The company evolved from being a soletrader so they bring with them the clients and the reputation. They also find all the jobs and do all the admin and compliance side of the business. The other party just wants to do the work and not be involved in the paperwork.

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to tanyajackson
12th Apr 2019 14:56

Why is the other party a shareholder?

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to tanyajackson
12th Apr 2019 15:01

Now perhaps it is now you that is not thinking straight. Having “another full time job” is no reason for any sane person not to want to have other income as well.

Why does he want his dividend to be “small”. That is the opposite of what any rational person would prefer, given the option.

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to Matrix
12th Apr 2019 13:35

Best guess: a consequence of government policy to tax employment so heavily is that the OP plans to use dividends as a form of remuneration.

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to Tax Dragon
12th Apr 2019 13:42

Tax Dragon wrote:

Best guess: a consequence of government policy to tax employment so heavily is that the OP plans to use dividends as a form of remuneration.

That's been the root of the financial problems of successive Governments over the past 40 years or so. Particularly in relation to NI contributions.

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to lionofludesch
12th Apr 2019 14:04

Serious question: why don't they change it? Instead by cutting CT and putting NI up, doesn't it get worse every year? It's like we have an employment income surcharge now. (Possibly anyway - I've heard about the investment income surcharge only as a myth, a dark fable, a horror tale, told across the flickering embers of a midnight fire, wherever hardened tax dragons gather to drink fermented vegetable products and compete in tales of blood chilling terror.)

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to Tax Dragon
12th Apr 2019 14:33

Tax Dragon wrote:

Serious question: why don't they change it? Instead by cutting CT and putting NI up, doesn't it get worse every year?

Dunno. I'd just charge close company dividends above a certain threshold to NIC, not necessarily at Class 1 rates, maybe a new Class 5. Could be more, could be less.

Job done.

Or bring back Excess Profits Tax.

Better still - don't bleat about the cost of pensions and the NHS when you've created a situation where millions of people are getting a free ride.

There's a lot of thick people in Government, you know. They're not all as bright as Dave Cameron. Why not just employ folk under normal employment contracts instead of trying to get contractors to understand complex IR35 issues ? The Government create most of the problems that they struggle to solve.

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to lionofludesch
12th Apr 2019 15:02

If you go into politics, you might just have won yourself a voter.

What does the OTS do? Is it not allowed to suggest genuine simplification if that amounts to policy suggestions?

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to Tax Dragon
12th Apr 2019 15:56

Tax shouldn't be taxing.

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12th Apr 2019 13:40

I think Mr 60% needs to think very carefully about the effect of this.

You say he's got 60% because it's his name and contacts that bring in the work so he's clearly thinking he deserves 60% of the income and assets of the company.

So why is he wanting to give away that advantage ?

As Matrix says, this largesse, whether by waiver or share class, is forever.

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to lionofludesch
12th Apr 2019 13:49

I think Ms 40% could also do with reflecting on what she's going to get - or not get, depending.

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12th Apr 2019 13:43

Is it not viable for the 40% shareholder to have B shares opposed to A shares with dividends being issued as and when voted by the 60% A shareholder?

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to tanyajackson
12th Apr 2019 13:55

Why didn't you ask this three weeks ago?

Oh wait, maybe you did: https://www.accountingweb.co.uk/any-answers/dividends-paid-out-different...

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to Tax Dragon
12th Apr 2019 14:54

Just read the article, it didn't get much feedback.

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to tanyajackson
12th Apr 2019 14:58

"Anonymous" is this site's least loved OP.

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12th Apr 2019 13:57

It’s not my place to question the wisdom or otherwise of what your client is proposing. The simple answer to your question is yes, waivers or alphabet shares will achieve the desired dividend split. What your client will need to be aware of is the possible tax treatment of the dividends paid as something other than dividends - for example if, as is suggested above, they are in substance a reward for service.

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to Wilson Philips
12th Apr 2019 14:47

Ok, so in theory
Mr 60% with A Shares can issue dividends to Mr B shares as an when he chooses
Mr 60% with A Shares can also take dividends when he chooses
Mr 60% with A shares retains control over the company

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to tanyajackson
12th Apr 2019 15:03

In theory, yes. But:

Assuming that the dividends are interim, they are declared by the directors and board resolutions are normally - unless the Articles provide otherwise - determined by a simple show of hands. So 'Mr 60%' would need the agreement of 'Mr 40%' .

Final dividends are approved by ordinary resolution of the shareholders so 'Mr 60%' can approve such dividends on his own - although they are also ususally recommended by the directors so also need to pass the board's approval first.

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to Wilson Philips
12th Apr 2019 15:13

Ok so,
as both shareholders are both directors, it's safe to say that all dividends should she signed of by the board.
And the final dividends should be signed off by both the board and Mr 60%.

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By Matrix
to tanyajackson
12th Apr 2019 15:06

They should get a shareholders agreement. If you are the adviser then make sure you understand what has been agreed commercially and you advise on the optimal solution together with tax risks/implications. They may wish to take their own legal advice and may need different tax advisers, so ensure you are not conflicted.

If you determine that changing Mr 40%’s A shares to B shares is the way forward then do the necessary paperwork including changing articles.

If Mr 40% is doing all the work and Mr 60% can choose not to pay a dividend that month then it could fall apart and, sadly in many of these joint businesses, it does eventually in my experience.

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to Matrix
12th Apr 2019 15:18

Matrix wrote:
If Mr 40% is doing all the work and Mr 60% can choose not to pay a dividend that month then it could fall apart and, sadly in many of these joint businesses, it does eventually in my experience.

And therein lies the potential tax problem (as well as the commercial risk that 'Mr 40%' doesn't get paid). If there is anything which guarantees that 'Mr 40%' is going to receive dividends in return for doing all the work ...
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to Wilson Philips
12th Apr 2019 15:38

On which note, the OP might find this thread https://www.accountingweb.co.uk/any-answers/paying-dividends-to-only-som... more useful than the other one I pointed to.

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to Tax Dragon
13th Apr 2019 00:46

I meant this one too (the ERS part of it anyway - my question above of how Mr 40% had come to be a shareholder remains unanswered): https://www.accountingweb.co.uk/any-answers/appoint-a-new-financial-dire... - these threads seem to have merged together in my mind, I hadn't realised quite how many we'd had on related topics.

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12th Apr 2019 22:34

Pardon the statement of the obvious, but there are differences between interim and final dividends. The major one is there is no entitlement to an interim dividend until it is actually paid. So, a shareholder cannot waive his/her entitlement to an individual, interim, dividend. It is therefore necessary to waive (in advance) entitlement to all future interim dividends.
In contrast, final dividends can be proposed and entitlement arises based on the terms on which they are to be paid. So for example, a final dividend of £× could be voted for the year ended 31 December 2018 which is to be paid on 1 May 2019. Any shareholder can waive his/her entitlement to that dividend without impacting future, final, dividends.
So, the directors can declare monthly, interim, dividends and if Mr 60% has waived his entitlement that is fine. He could still take a final dividend if he so chose (and assuming it was declared by the directors and then approved by the shareholders).
As has been said elsewhere however, HMRC could challenge dividends paid as remuneration for services (which the post suggests would be the case here). Also, they may look closely if the company would have been unable to pay dividends at the same level had Mr 60% not waived his entitlement (though as the shareholders are apparently not connected, this again is likely to be along the remuneration route).

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to whitevanman
12th Apr 2019 23:07

I beg to differ. It is quite common to see effective waivers drafted along the lines of “I understand that the directors are considering declaration of an interim dividend to be paid on dd/mm/yyyy and I hereby irrevocably waive ...”

The point being that to be effective the waiver needs to be executed before entitlement arises.

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