Would a £7m dividend be challenged by HMRC?

Would a £7m dividend payment in a new micro business be challenged by HMRC?

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Hi, I'm trying to find out what level of dividend payment would be deemed excessive and cause problems with tax/HMRC.

Let's assume that new co has one employee with a salary of £80k. The new co receives payments of £7.25m early in year one, this payment event may not repeat again. What tax parameters are there in relation to dividend payments? Could £7m in dividends be extracted before corporation tax kicks in?

I expect that there's probably some sort of maximum amount or ratio.

Thanks in advance for any thoughts!

Replies (63)

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By ireallyshouldknowthisbut
28th Mar 2024 09:15

Well if you follow properly the legal process for declaring a dividend you have found your answer as there will most likely not be sufficient distribtiuable reserves.

But we dont know, there might be. last time you posted your company was insolvent. This is where you need those people called "accontants" who do this stuff for a day job.

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Replying to ireallyshouldknowthisbut:
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By FingerBob
28th Mar 2024 10:11

Hi,

I'm trying to scope-out different scenarios. The company from three days ago isn't a new co; it has a serious enquiry about the intellectual property hence my question. This thread is for a different co/venture.

Both of these scenarios became possibilities within a day of each other last week. I have accountants that I've used previously, and one or two others that I'm considering using - I've yet to work-out who's best for different requirements.

Thanks for your reply.

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Replying to ireallyshouldknowthisbut:
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By FingerBob
28th Mar 2024 10:11

Hi,

I'm trying to scope-out different scenarios. The company from three days ago isn't a new co; it has a serious enquiry about the intellectual property hence my question. This thread is for a different co/venture.

Both of these scenarios became possibilities within a day of each other last week. I have accountants that I've used previously, and one or two others that I'm considering using - I've yet to work-out who's best for different requirements.

Thanks for your reply.

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By johngroganjga
28th Mar 2024 09:15

There is no maximum other than the availability of retained profits for it to be paid out of. Just ask your accountant what the best estimate of profit after tax is and that figure can be paid as a dividend.

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Replying to johngroganjga:
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By FingerBob
28th Mar 2024 10:13

Hi,

Thanks for your reply John. I thought (perhaps wrongly) that corporation tax was only applied at the end of the financial year, so any revenue that comes in and back out prior to that isn't liable to be taxed. But, from what you're saying it sounds as though dividends are paid after corporation tax.

Thanks again!

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Replying to FingerBob:
By Ruddles
28th Mar 2024 10:19

FingerBob wrote:
I thought ... any revenue that comes in and back out prior to that isn't liable to be taxed.

Oh dear

If that were the case no company (at least none of my clients) would ever pay tax.

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Replying to Ruddles:
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By FingerBob
28th Mar 2024 10:44

Thanks for your reply - yes, I can see the problem now lol.

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By David Ex
28th Mar 2024 09:18

You needed an accountant 3 days ago and you still need one now.

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Replying to David Ex:
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By FingerBob
28th Mar 2024 10:13

Lol ...this is true! Thanks David

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By Bobbo
28th Mar 2024 09:19

FingerBob wrote:

Could £7m in dividends be extracted before corporation tax kicks in?

Please tell me more about this 'kicking in' of corporation tax

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Replying to Bobbo:
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By JD
28th Mar 2024 09:37

An accountant would know that dividends are paid from after-tax profits/reserves. As others have noted, Fingerblob, you really do need an accountant to be advising you on this, especially given the amounts involved, the personal tax position as well as that for the company.

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Replying to JD:
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By FingerBob
28th Mar 2024 10:18

Thanks for your reply JD, I was unclear about the sequence of events, and thanks to you and other respondents here, I now know that it's after-tax profits. I accept I need an accountant, or possibly two. Thanks again!

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Replying to Bobbo:
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By FingerBob
28th Mar 2024 10:15

Hi Bobbo, thanks for your reply. Yes it sounds like I've got the sequence wrong here, and that dividends are paid after corporation tax.

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By Duggimon
28th Mar 2024 09:35

If the £7m is taxable then Corporation Tax "kicks in" when you receive it, regardless of when you get round to filing your tax return. You could spend as little as 1/20 of 1% of that £7.25m and get some actual proper advice.

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Replying to Duggimon:
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By FingerBob
28th Mar 2024 10:21

Thanks for your response. I was unclear on the kicking-in part, and thanks to you along with others on this forum, that's now resolved.

I understand that I need to engage an accountant - that's going to happen in due course. My question was just to understand the basic parameters.

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By Justin Bryant
28th Mar 2024 10:11

Never mind all that.

What we all want to know is what is this one-man micro company doing to get such huge income/profits?

HMRC are very good at identifying such dividends re income tax. See: https://www.accountingweb.co.uk/tax/hmrc-policy/hmrc-gets-on-the-case-of...

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Replying to Justin Bryant:
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By I'msorryIhaven'taclue
28th Mar 2024 10:19

And, before you answer, be aware that lottery jackpots are tax-free!

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Replying to I'msorryIhaven'taclue:
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By FingerBob
28th Mar 2024 10:30

Damn! All these years I should've just been playing the lotto!!

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Replying to Justin Bryant:
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By FingerBob
28th Mar 2024 10:26

Hi Justin,

Lol - thanks for your reply. I create IP in the AI/crypto space - I've been at it for a long, long time and last week two separate projects came home to roost (at long last). So it's taken me the best part of 15 years to be on the cusp of becoming an overnight success. Thanks also for the link!

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Replying to FingerBob:
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By Justin Bryant
28th Mar 2024 10:30

And the obvious follow-up question: can we all invest in this amazing stuff you do and if so how? I mean, where do I sign? (Fingerbobs was my favourite TV programme if that helps get me to the front of the queue.)

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Replying to Justin Bryant:
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By FingerBob
28th Mar 2024 10:38

Ahh ...I'd be cautious there Justin, because in both instances (if either of them actually transpire) I'm effectively exiting/partially exiting. Besides, they would be commercial acquisitions - still got T&Cs to go through, so plenty of scope for things to go south!

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Replying to FingerBob:
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By Justin Bryant
28th Mar 2024 10:41

Noted with thanks and if you need any tax & legal advice thereto I'm pretty good at that.

www.ated.co.uk

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Replying to Justin Bryant:
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By FingerBob
28th Mar 2024 10:46

Thanks Justin - yes, I'll keep that in mind.

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Replying to FingerBob:
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By David Ex
28th Mar 2024 10:37

FingerBob wrote:

I create IP in the AI/crypto space - I've been at it for a long, long time and last week two separate projects came home to roost (at long last). So it's taken me the best part of 15 years to be on the cusp of becoming an overnight success. Thanks also for the link!

Your tax planning should have started 15 years ago.

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Replying to David Ex:
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By FingerBob
28th Mar 2024 10:43

True, but when you start out on a journey with no clear way forward, and with no income, it takes someone smarter than me to look into the future and know what the tax implications are going to be a decade later.

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Replying to FingerBob:
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By David Ex
28th Mar 2024 10:37

Duplicate

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Replying to FingerBob:
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By David Ex
28th Mar 2024 10:37

Triplicate

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By paul.benny
28th Mar 2024 10:51

One more thing...who actually owns this valuable IP? Having it owned in your company may not be the most tax efficient way - and even selling/licensing in one lump may also not be optimum.

I'm not suggesting rewriting history but there is probably a lack of proper documentation to definitively establish title to your IP - which may give an opportunity.

You need an accountant - and a lawyer with relevant experience to negotiate the sale or licensing of your IP. With absolutely no disrespect of anyone here, for most, maybe all of those who post here, this is way beyond their experience.

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Replying to paul.benny:
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By Justin Bryant
28th Mar 2024 10:57

Well, I'm both an accountant and a lawyer.

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Replying to paul.benny:
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By FingerBob
28th Mar 2024 10:58

Thanks for your reply Paul, in one instance it's the company, in another it's not yet decided. Your right to ask these questions, and the answers are related in some way to tax - this is why I'm trying to just refresh my memory on the basics. I'm covered on the IP legal side of things, just need to make a call on the accountancy side. Thanks again!

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Replying to paul.benny:
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By FactChecker
28th Mar 2024 11:04

Was about to make broadly the same point ... that the time for detailed discussion with appointed professionals is BEFORE any negotiations (let alone sale) - as it can be hard to 'reverse engineer' (putting it politely).

And I'm confused:
"The new co receives payments of £7.25m early in year one" vs "I create IP in the AI/crypto space"
So owns whatever is being sold? And will that constitute revenue or asset disposal? And so on ...

Best of luck to OP - but now is not the time to take a chance on dealing with the rewards from 15 years.

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Replying to FactChecker:
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By FingerBob
28th Mar 2024 16:31

Hi, thanks for your reply. I'm not too concerned about the negotiations or IP side of things, as I have those covered-off. I have some insight into the accounting side of things, but I'm rusty combined with poor memory following a stroke, so just trying to get a feel for the landscape.

I own the first co 100%, and the second co hasn't been incorporated yet. Agree that I need to get on top of things, and that's what I'm starting to do.

Thanks again!

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RLI
By lionofludesch
28th Mar 2024 12:02

[sigh]

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DougScott
By Dougscott
28th Mar 2024 12:41

£7 million? And this guy is asking for free accountancy advice? Well, I suppose if he pays more taxes than he needs to then that's good for our beleagured public services.

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Replying to Dougscott:
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By FingerBob
28th Mar 2024 16:33

Hi, thanks for your reply. I'm not asking for free advice - I'm on a forum. Also, neither of the deals are completed and none of the money is available to me at this stage.

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By I'msorryIhaven'taclue
28th Mar 2024 12:59

Paul Benny's question relating to ownership of the IP triggered an alarm bell with me.

Fingerbob, you've told us you've been 10 or 15 years developing this IP and that your limited company has yet to raise a sales invoice but is £500k in the red and that you are its main creditor. May we deduce that you have outside employment - a day-job - outside of this IP project with your own company?

If so, as I imagine Justin would be able to confirm, the default position under English law is that if IP is created by an employee in the course of his/her employment, that IP will automatically be owned by the employer.

Just a shot in the dark... have you been an employee (with a contact of service) of a third-party employer over those years; or a self-employed contractor (with a contract for services)?

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Replying to I'msorryIhaven'taclue:
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By lionofludesch
28th Mar 2024 13:09

I'msorryIhaven'taclue wrote:

If so, as I imagine Justin would be able to confirm, the default position under English law is that if IP is created by an employee in the course of his/her employment, that IP will automatically be owned by the employer.

Same in Scotland, too. I recall an episode of Still Game where a case rested on whether Pete the Jakey had created the recipe for the Beefy Bake in company time or in his own kitchen at home.

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Replying to lionofludesch:
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By I'msorryIhaven'taclue
28th Mar 2024 13:37

Ha ha, and I imagine Pete the Jakey worked at McGreggs.

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Replying to I'msorryIhaven'taclue:
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By lionofludesch
28th Mar 2024 13:46

I'msorryIhaven'taclue wrote:

Ha ha, and I imagine Pete the Jakey worked at McGreggs.

No - Henderson's.

https://www.youtube.com/watch?v=uLWCzqbrrsI

Series 6, Episode 6 Recipe (full episode)

https://www.youtube.com/watch?v=DbObjvWhDOs

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Replying to I'msorryIhaven'taclue:
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By FingerBob
28th Mar 2024 16:48

McGreggs lol

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Replying to I'msorryIhaven'taclue:
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By FactChecker
28th Mar 2024 13:40

With the usual caveat of IANAL, the key phrase in your 'default position' is "in the course of his/her employment".
I've had to argue this a few times over the past 30 or so years (from different sides in different cases!) and, although the fine-tuning was always left to the lawyers, it seemed to me to always hinge on:
- (to a lesser degree) whether the work was carried out on employer's premises, using employer's facilities, in time paid for by employer (getting progressively more ER-owned);
- (to a larger degree and almost clincher) whether the work was similar to (or even the same as or competitive with) the work being performed for employer.

One example: software engineer does own design & development by staying late in the office (so yes to premises and facilities, but no to getting paid for time) = 50:50; but if app NOT similar/competitive with applications created for Employer, then IP remained with the individual.

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Replying to FactChecker:
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By I'msorryIhaven'taclue
28th Mar 2024 13:52

I hear what you say about similar work, FC, and I guess we need to hear from the OP.

We're assuming his day job's in IT , but for all we know he could be a Greggs' baker!

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Replying to I'msorryIhaven'taclue:
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By FingerBob
28th Mar 2024 16:41

Hi, thanks for your reply. Not to worry. There are two different projects that I've been working on and both of them appear to be coming to fruition at the same time. The first co, the one in the red is trading and (if the deal goes through) is a sale of the IP or possibly the company with the IP in it. The second is revenue via IP, but the IP maybe a one-shot only event. Neither deals are confirmed, but negotiations are under way with both - it's feasible they may both collapse.

My day job is what I've been working on, so no third party employer to be concerned about, but yes, you're right that would be a concern if it were true. Thanks for the thought!

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By Matrix
28th Mar 2024 13:45

Wow, you can retire on that. If only there was some kind of retirement tax relief ;)

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Replying to Matrix:
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By lionofludesch
28th Mar 2024 13:47

Matrix wrote:

Wow, you can retire on that. If only there was some kind of retirement tax relief ;)

[chuckle]

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By Paul Crowley
28th Mar 2024 13:55

What you describe as a dividend would not really be a dividend. It would not be paid out of reserves. You did not leave enough money in the company to pay the Corporation Tax.
The liquidator would treat it as an illegal dividend and reclaim what is really just a loan.
But for income tax purposes, as in paying your higher rate on dividends, it would be a dividend that is taxable.
Best you get an accountant that can help you navigate basic tax an company rules

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Replying to Paul Crowley:
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By FingerBob
28th Mar 2024 16:46

Hi Paul, thanks for your reply. In reality, I now understand I'd have to pay corporation tax first, so to be honest that more or less answers my question. Agree on the accountant, it's something that's part of the plan. Thanks again!

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By FingerBob
28th Mar 2024 16:51

Thanks everyone for your input on this.

I realise it all sounds a bit loose, but your input has helped push me in the right direction. I'm progressing, and hopefully both deals will go through - one or both might fall before the finishing line. Time will tell, but I have a better feel for things thanks to your help.

Thanks again!

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By Tax Dragon
28th Mar 2024 23:16

I do hope you remember to consult an advisor. So few of the pertinent issues have been mentioned, let alone discussed, in this thread. Let's pick the most obvious: how does the IP that's been 15 years in development find itself in NewCo2?

This question might help you better understand paul.benny's excellent comment - and recommendation.

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Replying to Tax Dragon:
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By FingerBob
02nd Apr 2024 17:39

Hi Tax Dragon,

Thanks for your reply. It's two different pieces of IP, so there is no correlation or overlap between the IP/companies.

Thanks again!

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