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Tribunal rules dividend waiver was settlement

7th Feb 2014
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A recent First-tier Tribunal case has once again highlighted the dangers of using dividend waivers to reallocate income between shareholders, writes BDO tax director Jeff Webber.

HMRC does not hesitate to challenge such arrangements under the settlements legislation, and companies should therefore avoid using this or other similar methods of allocating income to particular individuals.

In the Donovan & McLaren v HMRC case, two directors regularly waived dividends, enabling their wives to receive a higher proportion of the dividends actually paid by the company, and thereby utilise their income tax basic rate bands.

The taxpayer’s representative argued that:

  • A commercial decision was taken to waive the dividends, to ensure that the company maintained workable reserves and cash balances in order to accumulate sufficient of each to fund the purchase of the company’s own freehold property; and:
  • It made “tax planning sense” that the benefit of the dividends was used in the correct way

However, HMRC contended that:

  • There was no commercial purpose to the dividend waivers, and the retention of profits could have been more easily achieved by voting a lower rate of dividend
  • The company had insufficient distributable reserves to pay the dividends if there had been no waivers
  • The intention was simply to allow higher dividends to be paid to the directors’ wives than their respective shareholdings entitled, and lower dividends to be received by their husbands
  • The arrangement would not have been entered into with someone at arm’s length and it therefore plainly contained an element of bounty
  • The waivers of dividend by the directors and payment of dividends to their wives therefore constituted an ‘arrangement’ under the settlements legislation in S 620 ITTOIA 2005, and the exception which allowed income to be effectively transferred in the Jones v Garnett (Arctic Systems) case did not apply, because there had been no transfer of shares

The tribunal agreed with HMRC and decided that the “irresistible inference” from the facts was that the directors waived dividends as part of a plan to ensure that dividend income became payable to their wives.

This constituted an arrangement under the settlements legislation, and the exception in the Jones v Garnett case did not apply, for the reasons stated by HMRC, as had also been held in the 2008 Buck v HMRC case.

This highlights the need for companies to take care and, if necessary, appropriate professional advice when considering using dividend waivers. HMRC clearly states in its manuals that it will look closely at the use of waivers where:

  • The level of retained profits, including the retained profits of subsidiary companies, is insufficient to allow the same rate of dividend to be paid on all issued share capital;
  • Although there are sufficient retained profits to pay the same rate of dividend per share for the year in question, there has been a succession of waivers over several years where the total dividends payable in the absence of the waivers exceed accumulated realised profits;
  • There is any other evidence, which suggests that the same rate would not have been paid on all the issued shares in the absence of the waiver;
  • The non-waiving shareholders are persons whom the waiving shareholder can reasonably be regarded as wishing to benefit by the waiver; or
  • The non-waiving shareholder would pay less tax on the dividend than the waiving shareholder.

If it is wished to allocate more income to another shareholder, this can currently still be done by ensuring that the required numbers of shares are held by each individual, transferring shares to a spouse or civil partner where necessary, so that the ‘Arctic Systems’ exception can apply.

The Arctic Systems case concerned a company with only one class of shares, and it should be noted that HMRC considers that the use of different classes of shares, with dividends being voted separately on one or more classes so as to benefit particular shareholders, can also constitute a settlement arrangement.

Jeff Webber is a tax director with BDO and a consultant on BDO’s Tax Support for Professionals Taxline.

Replies (12)

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By Sheepy306
07th Feb 2014 13:34

Interesting case and it seems that the lack of sufficient reserves to waiver the dividend on multiple occasions was a major factor in their defeat. Would be interested to hear of other cases where HMRC have successfully applied settlements legislation to husband and wife companies where there are 2 different classes of shares, a structure that a number of us on AWeb advise and apply to our clients.

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By stepurhan
07th Feb 2014 17:05


It would seem to be the key to have some solid commercial basis for any such future decisions. The implication in the judgement is that, had there been a commercial basis for the dividend variance, then it would have been acceptable.

Of course, the reallocation of shares in suitable proportions is still acknowledged as a workable strategy. I wonder why businessmen are not giving 99% of their shares to their wives. :-)

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By Steve Kesby
07th Feb 2014 18:03

Search for patmore under FIT decisions on BAILII. It's a similar decision in respect of alphabet shares.

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By Carolynne
10th Feb 2014 13:36

Dividend Waiver Query

I would like to ask a couple of things about this, if anyone can help. 

If I have a business where there are 3 directors with 1 share each, a father and two sons.  The father has retired from the business but still holds a share.  If there is sufficient profit to declare £45,000 worth of Dividends at £15,000 per share.  The Father does not want his dividends, thus signs a waiver so that both sons receive £22,500 dividends each. 

No-one on their current income will pay any higher tax, even if the father received his dividend.  If nothing to gain in taxes by HMRC, would this new tribunal ruling, impact on my client, if they wish to continue to waiver?

Thanks in advance


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By Steve Kesby
10th Feb 2014 13:58

@ Carolynne

No.The settlement provisions (that are the subject of this case) only bite where if their are circumstances in which the settlor (or their spouse or civil partner) might receive the settled property (or any related property) or have it applied for their benefit.

So in this case the waiver is the settlement of income on the settlor's spouse. It doesn't then fall within the exemption for spouses, and so the income remains taxable on the settlor.

In the circumstances you describe, if the intention is that the sons will keep their dividends, there aren't circumstances in which the dad will receive the money (or anything that flows from it) or have it applied for his benefit.

That is subject to one caveat though. I'm assuming that the sons are at least 18. If an unmarried minor child receives income from a parental settlement of more than £100 (per settlor) in a tax year, then it is taxable on the settlor parent.

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By Carolynne
10th Feb 2014 15:53

Dividend Waiver

Many thanks Steve, Phew!  Yes the sons are adults and both fully work in the business too.

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By jonsa
10th Feb 2014 16:23

@ Carolynne

Not sure if I have read this right.  Dividend is £15,000 each share.  If dad waives his dividend, each son receives £15,000, not £22,500.  £22,500 each would mean a dividend total of £67,500 initially and there may not be enough profits for that.

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By GuestXXX
17th Mar 2015 16:11


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By Steve Kesby
10th Feb 2014 20:02

@ jonsa
If the company has available reserves of £45K and dad waives his entitlement to the forthcoming dividend, then the company can legitimately pay dividends of £22.5K to each son.

The point of the company not having sufficient reserves to distribute £22.5K without dad's waiver is just that dad has settled £7.5K on each son.

It's not a settlement that falls foul of the settlor-interested settlement provisions though, unless there's some arrangement for the money to go back to dad.

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By Carl London
11th Feb 2014 12:11

'Arctic Systems exception' variation

A further question - on the 'Arctic Systems exception' would it make any difference whether shares were subscribed at par on incorporation or whether they were gifted (husband and wife situation) after incorporation?

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By Steve Kesby
11th Feb 2014 19:59

@ Carl
In Arctic Systems there was only a settlement of shares, being a right to capital and income (and voting). The wife then received her share of dividends.

With a waiver, there may have previously been a settlement of share, but it's the waiver that's the problem.

If the dividend actually paid to the wives couldn't have been paid without the waivers (because there wouldn't then have been sufficient reserves) the husbands have settled pure income on the wifes, by waiving.

It's a settlement of pure income on a spouse that fails the exception.

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12th Feb 2014 20:09

@ Carl

As I understand things, I think gift vs subscription would make a difference. For example, if the shares are gifted after incorporation, say after a year, when the company has been trading, accumulated reserves and has value, HMRC could argue the shares carry bounty and are a right to income and the gift has occurred in order to minimize the fee earner's higher rate tax liability. Therefore HMRC could attack the gift after incorporation under the settlement's legislation. Whereas shares at incorporation when the company has no value would not carry any bounty. The accountancy firm Nixon Williams has a really interesting pdf on income shifting.

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