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Would this be classed as tax avoidance

Would this be classed as tax avoidance

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Please could I ask your opinion on the following...we have a Limited Company with 3 directors who also own a third of the shares each. Each year the company pays a dividend in equal share to the Directors from any profits. Last year one Director started doing a lot of extra work in their own time (evenings and weekends) that resulted in lots of new business and it was agreed he would be paid a monthly bonus (variable based on business). Last year this was paid via salary and thus attracted higher rate tax and NI, etc. Our accountants have advised that we should change to paying the bonus via dividend. They said that it is perfectly ok to declare and pay a dividend to one shareholder (Director) at any time, provided that all the shareholders agree. I have 3 concerns about this (1) Is this correct that a dividend can be paid in this manner, (2) Would it not be seen as tax avoidance, having taken an increased salary for a year and then changing to dividends, (3) The accountant says that this is all fine but then suggested that it might be worth having insurance to cover accountant fees should it ever be challenged !!! Thank you very much indeed for any info.
 

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By merlyn
06th Oct 2013 19:09

Share Classes

Why not just setup some additional share classes so each director can be paid different dividend amounts ?

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By pedant
06th Oct 2013 20:47

Share classes or waiver

Can be done with a waiver from the other shareholders, but it isn't legal to pay different dividends to the same class of shareholder.

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By hztm
06th Oct 2013 23:14

Thanks for the advice. We thought about the different classes of shares but this would then set a specific level of dividend due. The issue is that the payment due to the one director may vary each month. He may be due 10K this month but only 3K the next. I am beginning to think that the only option is to keep paying this via PAYE or possibly salary sacrifice to pension (which he does not want). The shareholder/director is thinking of withdrawing their additional services as it is not worthwhile for them but I guess we are all subject to the same rules so, as bad as it will be for the business, we may just have to lose his additional services. 

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By Mouse007
07th Oct 2013 00:14

Hold on

It can be done, your accountant's advice appears a little off target (duff), but don't give up yet.

Two options are:

1 Waiver of dividends (messy if changing every month)

2 Alphabet shares

(both as suggested above)

You are correct to be concerned about getting the details right, perhaps time to have a chat with someone else?

 

 

ps, there is nothing wrong with avoidance

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By The Innkeeper
07th Oct 2013 09:33

@mouse007

Your cartoon inserts are so great . Are you prepared to give the link

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Replying to LuzTLundstrom:
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By merlyn
07th Oct 2013 09:39

Right Click

The Innkeeper wrote:

Your cartoon inserts are so great . Are you prepared to give the link

 

Right click on the image, select properties and you will see it's http://i323.photobucket.com/albums/nn464/Mouse1812/lawyer_visiting_client_lg_wht_zpse37f30b8.gif

 

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By Mouse007
07th Oct 2013 09:52

Ah

but that's my album, and it's private. You can't see what other pics I've collected from tinternet.

They are hidden

 

Waiting to use some great ones of "Hector" I am.

If you want to see my favourites so far check my "about me" on AWeb.

 

 

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By gbuckell
07th Oct 2013 10:45

ITEPA 2003 s447

This arrangement (waivers or alphabet shares) would be vulnerable to challenge under ITEPA 2003 s447.

It is worth reading the commentary in HMRC manuals.

See in particular http://www.hmrc.gov.uk/manuals/ersmmanual/ERSM90060.htm and http://www.hmrc.gov.uk/manuals/ersmmanual/ersm90210.htm.

Having said that, HMRC seem to be very sparing in its attempts to apply this provision in practice so it will probably work - for now at least! But HMRC's attitude could change in the future and it could then go back 6 years.

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By Martin B
07th Oct 2013 17:26

Dividend wavers

flagging

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By andrew.hyde
09th Oct 2013 11:22

Yes but is it a dividend?

To quote the original post

'it was agreed he would be paid a monthly bonus'

Which prompts the question 'How was it agreed?'.  Is it in the minutes of a meeting?  Was it agreed orally, then confirmed in a letter?  Was it expressed to you in a letter? Or have you minuted an oral explanation given to you?  In short, what is the evidence?

The word 'bonus' points strongly to employment income.  If that is the wording in the evidence you hold, then IMHO there is a strong presumption that all payments stemming from this decision are in fact employment income, until and unless the directors set aside the arrangement and make another one.

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By bggoose1
09th Oct 2013 11:38

Don't forget the need to comply with Companies Act

Waivers of dividends if carried out on a regular basis are open to attack and I have seen this happen.

Creating alphabet stocks is something used quite often. 

If you are declaring and paying dividends on a monthly basis, there are still Companies Act requirements to be met.  Such as you need to produce minutes in relation to the dividend and produce evidence that the company has sufficient distributable reserves available at the time that the dividend is declared.  Quite often management accounts are sufficient but you should not lose sight of the fact that you need to be sure that the dividends are lawfully declared otherwise you open a whole new can of worms.

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By KungFuKipper
09th Oct 2013 11:52

Properly additional services or part of duties?

Could the Director not set up a new co, specialising in Sales Consultancy and provide services to the old company?  I understand that if the services should be provided as part of their existing duties this might be 'circulation' or fail IR35 or similar.... if the services are genuinely additional and could be provided as part of a New Co, would this not work?

 

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By janeybaby0
09th Oct 2013 11:53

Something I have been told on courses.

What about the value of the shares on a sale in the future. Would there be a reduction in value if there was a waiver on the monthly dividends, ie the shareholders have restricted their entitlement to dividends on a monthly basis consistently, therefore those shares are no longer worth as much? ....not sure, as i say it is something that has come up on courses.

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By trotters
09th Oct 2013 12:41

Increase his shareholding

If the individual is prepared to put so much more effort into the business than the other directors, would it not be fair and better all round to increase his share in the business. It would mean diluting your own shareholding but I would rather have a smaller part of a very profitable business than a bigger part of a marginal business.

I wouldn't suggest increasing to more than 49% as this will mean he has overall control.

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Replying to Ruddles:
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By I'msorryIhaven'taclue
09th Oct 2013 12:50

Sigh

trotters wrote:

If the individual is prepared to put so much more effort into the business than the other directors, would it not be fair and better all round to increase his share in the business. It would mean diluting your own shareholding but I would rather have a smaller part of a very profitable business than a bigger part of a marginal business.

How would you feel if your partnership share of your practice was diluted in favour of a partner who was putting in extra work?

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Replying to Ruddles:
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By trotters
09th Oct 2013 13:18

Perhaps you would like reread my comment, I've answered your question, Sigh.

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By pauljohnston
09th Oct 2013 12:48

Alphabet Shares would be the way

forward if your director wanted to go down the dividend route. 

As others have said a bonus is normally treated as PAYE.  Contracting through a company would likely attract IR35 but see the HMRC tests.

As others have said issuing new shares gives the director an increased share of capital which may or may not be what the directors as a whole want to do.

I would avoid waivers.

I suggest that it is time to get advice from someone who can advise the Company.  You dont have to change accountants just get specialist advice on this point.

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By David Gordon FCCA
09th Oct 2013 13:03

Do not make it difficult

 

 Set up different classes of shares, so that each class may be paid dividend at a different rate.

 At the beginning of the accounting year, or ASAP, vote estimated dividends for the ensuing half year.

 Make sure you have prepared the correct paperwork- minutes of meetings dividend vouchers etc.-carefully dated etc.

 Pay basic RTI salaries*** (National minimum rates @ 30 hours?)

 Any payment ( cash, benefits, or in kind) to the director over and above the salary level may be credited to unpaid dividends account. (director/shareholder's current account/)

 At the end of the year the director/ shareholder may waive unpaid divs, or carry the balance forward and vote a lesser amount in the year following.

 If you have already paid/declared salary 2012-13 on P35, and or 2013-14 through RTI, then HMRC may look askance at any attempt to retrospectively reduce those salaries.

 ***Remember salary levels may have a knock on effect on mortgage, loan, credit card, applications, and pension entitlements. 

 Make sure that the director has an agreement with the company that, in the absence of any minuted agreement to the contrary, payments (cash, benefits, or in kind) to the director are deemed first against o/s director's account balance, then against salary.

 You may wish to consider agreements that the company does not pay overtime for necessary work carried out overtime, or on statutory holidays, but will reimburse necessary expenses, also that salaries paid are provisional and subject to board review and approval each tax year.

 

 

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By philfromleeds
09th Oct 2013 13:16

Extra work done by Director

I feel the honest way was that being done initially by paying a bigger wage to the director working more. Another idea is for the director who is working more to set up his own company and his company should charge for his extra work. Then he can give himself a dividend.

Is it fair that directors should be entitled to the old age pension by paying a few pennies National Insurance each month? In the age of cuts I feel that directors should be obliged to earn at least the minimum wage for 40 hours a week before they can issue  a dividend and their wage should be profit related after that.

 

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By David Gordon FCCA
09th Oct 2013 13:25

In reply to sigh

 I am old enough to have seen too many businesses fail because one co-owner felt that that the other co-owner(s) was/ were not pulling his/ their weight.

 Be big enough to sort it out, but do not sit there looking like you just sucked on a lemon.

 Come to think of it, it seems to me that most of these sort of problems originate with the perceptions of spouses of co-owners rather than the principals themselves.

 And yes, if A is happy to work all the hours God gives (on work that is available and required), but B prefers time with his family. This fact should be acknowledged.

 nevertheless it is kidding oneself, to believe us ordinary mortals in our profession are able to regularly work 50, 60 or 70 hours per week, and not make mistakes.

 The time-off rules are there for good reason.

 

 

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By AdShawBPR
09th Oct 2013 13:27

A, B, C, D, E, F, G ...

hztm, having different share classes doesn't set the dividend due on each - you're free to vote whatever dividend required on each class as and when - or am I misunderstanding your point?

I don't see this as a complex and contrived scheme likely to come under attack.  There is some forward planning but we're not playing a game of pin the tail on the donkey.

As has been suggested already, proper paperwork is more than a good idea - minutes for bonus, minutes for dividends.

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By The Black Knight
09th Oct 2013 14:33

substance over form

Substance over form? P A Holdings

Particulary if the agreement was to pay a bonus and now this has suddenly become a dividend.

 

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By johnjenkins
09th Oct 2013 15:14

David Gordon

is spot on and that is how I would advise my client. I have a few clients that operate this way with no problems. In fact when it is time to decide dividends all problems are aired and compensated accordingly.

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By hztm
11th Oct 2013 18:36

Many thanks to all parties. We do actually have alphabet shares already in place so it appears that this is the way to go. Thanks again

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By taxhound
12th Oct 2013 12:22

If you already have alphabet shares

Then your accountant's advice is absolutely fine.....

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