Remuneration of directors where one starts work before the other

Remuneration of directors where one starts work...

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New limited company has two directors.  The first is going to start working for the company immediately, and the second is going to work his notice period of six months in his current employment before working for the company.  Once both directors are working full time, and once the new tax year starts (they both have significant other income this tax year), they will each draw a small (equal) salary from the company and equal dividends. 

Obviously the directors wish their income from the company to be drawn as tax efficiently as possible.

The first director would like to draw some income from the company during the next six months, to reflect his contribution to the business while the second director has remained in his previous job.  The options I have considered so far are for the first director to pay himself a salary during the next six months, or to issue a new class of shares to the first director to allow a separate dividend to be declared for him alone.

Taking a salary is not tax efficient for the director in question, and a dividend would be the better route - but I am concerned that this would be considered to be disguised remuneration if it were made by means of an alphabet share. 

Do others have experience of such a situation that they would be willing to share? Thanks in advance for any assistance.

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By sparkler
09th Aug 2012 14:12

Anyone?

I'm hoping someone has come across this situation before - it must be reasonably common.  Any advice much appreciated!

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By justsotax
09th Aug 2012 14:37

dividend waiver?

not perfect but an alternative to alphabet shares.....but neither offer a particular satisfactory answer....

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By sparkler
09th Aug 2012 14:57

could you elaborate?
I had momentarily considered a dividend waiver, but other threads on this forum suggested they were complex and difficult to implement. I am not familiar with dividend waivers (nor indeed with alphabet shares) so I wonder if you might elaborate and outline the disadvantages.

I would prefer to suggest a simple salary payment to the director in question, but am concerned that I am being unnecessarily cautious if there is an alternative that could work without significant risk.

Thanks so much.

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By justsotax
09th Aug 2012 15:06

see link

 

below:

https://www.accountingweb.co.uk/topic/tax/dividend-waivers-get-details-right/481882

 

general guidance is use it sparingly, and for commercial purposes rather than pure tax avoidance....by doing so should not flag it up to hmrc.  And the circumstances you describe appear to fit in with both criteria.

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By Tonykelly
09th Aug 2012 15:36

just have A and B shares

this is the simplest option. The divdends can vary in future years without the need for dividend waivers etc.

Another option is he operates as a consultant for a short period and takes a fee from the mash-up for his services.

Depending on the figures, this may not be suitable, as you are possibly incurring class 4 NIC.

 

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By User deleted
09th Aug 2012 15:51

There is one phrase in the opening post ...

... which, if it found its way into HMRC's hands, could prove to be problematic if an Inspector were so minded to make an issue of the case.

"... to reflect his contribution to the business" In other words it is implicit from that statement that the intention is to reward the director for his efforts and not his investment. So it is possible, if highly unlikely, that the payment could be taxed as earnings whatever you decide to call it.

All I would suggest is that you try to avoid using such comments in board minutes etc!

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By sparkler
09th Aug 2012 16:53

Thanks for these helpful comments and links. To complicate matters further, each director also wishes his wife to be a shareholder of the business. The wives have their own income streams, so it would not necessarily be tax efficient for them to receive as large a dividend as the husbands. The logical solution would be to have alphabet shares A, B, C and D, one class for each shareholder (do the wives also need to be directors for them to have alphabet shares?), with different divs declared depending on the requirements of each shareholder. Or the two directors could share one class of shares, with a dividend waiver used during the initial trading period so that Director 1 can draw dividends before Director 2, with alphabet shares B and C issued to the wives. It all sounds quite risky in terms of being caught by the settlement legislation, or am I worrying unnecessarily and these seemingly complex share issues are common practice! The risk free route would, I suppose, be to pay salary to Director 1 (or he could consult as suggested), then all four shareholders would have equal shareholdings to receive equal dividends on ongoing basis - less tax efficient, but less 'fishy'?

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