Dividends on payslips

Dividends on payslips

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Last night I met with a potential new client.  All was going well until we got onto discussing payroll and he showed me one of his payslips prepared by the current accountant.

This is a long established business where the directors have previously taken big salaries and a year end dividend if profits allowed.  However at some point during 2010/11 they switched to minimal salary and monthly dividends.  The existing accountant has been showing the dividends on the monthly payslips as a non taxable item.  I did ask whether dividend vouchers had ever been prepared only to be met with the response 'what are those'.

So lets assume for the time being that minutes and dividend vouchers have been prepared.  By including dividends on the monthly payslips this, in my opinion is like waving a red flag to a bull as far as HMRC is concerned.  In the event of a PAYE enquiry what are the chances of being drawn into the argument as to whether the 'dividends' are really salary.  I'm guessing if minutes and dividend vouchers haven't been prepared this only makes matters worse.

Anyone come across this before?  Any advice much appreciated. 

Replies (4)

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By JCresswellTax
05th Jul 2012 09:06

OOps

Im with you on that - nothing more to add really, think you would have problems, especially if there are no monthly management accounts or other calculations to show reserves were available to actually pay these dividends.

Perhaps you could consider treating these amounts as director's loans and declaring a dividend at the end of the year to clear them.

Then the only error you would have is incorrect wording on the payslip.

You would have to deal with beneficial loan benefits for the directors but this is way better than if HMRC tried to contend that the dividends on the payslip were actually net salary payments!

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By sparkler
05th Jul 2012 09:08

I have not seen such treatment of dividends.  If they are actually dividends, then as you say, tax vouchers and board minutes should have been prepared for each.  Including dividends on payslips, regardless of whether they are marked as taxable, is certainly a flag to HMRC that such "dividends" are really salary. 

I would explain the situation to the potential client, and suggest that they insist that their existing accountant corrects all of the payslips to remove the reference to dividends, and ensures that the correct dividend paperwork is fully up to date, before the relationship is concluded.

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By adam.arca
05th Jul 2012 10:00

I have

Unlike Sparkler, I have seen this treatment (and obviously advised the client to cease doing it that way forthwith).

The problem is that most of us on here do know chapter and verse on dividends, but clients don't unless we educate them, obviously lots of accountants out there don't, and perhaps most surprisingly given it would be an easy win nor do most Revenue officers.

It can therefore sometimes be difficult to persuade clients to do it properly when the very few instances (touches wood) where this has been raised by the Revenue have proved to be the exceptions that prove the rule.

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By sparkler
05th Jul 2012 10:03

Adam, you are right that clients do not know how to manage dividend payments unless we educate them.  Today, I am trying to put together a directors loan account balance for a client who has paid (under the previous accountant), to the two shareholders who each own 50% of the shares, unequal "dividends" - random amounts paid on random days with no supporting paperwork.  Labelled as dividends on the cashbook, but clearly not.  As a matter of course, new clients receive from me both proforma board minutes and proforma dividend vouchers so that they can complete them each time they declare a dividend.

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