A question for the accountants
Discussion
I'm in the very early stages of merging with another company (Ltd).
There will be two 50/50 directors (me and a business partner)
We will both be bringing in business (income) to the company but there is a chance that there maybe a difference (possibly large) in the levels we bring in. We would both like to be remunerated in line with the business brought in.
We've spoken to two different accountants, each giving conflicting advice!!
One mentioned different share classes for each director and therefore different divis can be declared.
One mentioned that HMRC doesn't like the above - alphabet shares are frowned upon.
Who is right? is there a simpler/easier way?
Thanks in advance!
Pete
There will be two 50/50 directors (me and a business partner)
We will both be bringing in business (income) to the company but there is a chance that there maybe a difference (possibly large) in the levels we bring in. We would both like to be remunerated in line with the business brought in.
We've spoken to two different accountants, each giving conflicting advice!!
One mentioned different share classes for each director and therefore different divis can be declared.
One mentioned that HMRC doesn't like the above - alphabet shares are frowned upon.
Who is right? is there a simpler/easier way?
Thanks in advance!
Pete
Just because HMRC doesn't like something doesn't mean you can't do it - as long as it's legal.
Having said that, of course, if you go down the different share class route HMRC MAY want you to explain things in a bit more details each year.
(Form 42 comes to mind)
I would say a few things though.
You cannot be 50:50 Directors. If you are both directors, you generally carry equal responsibility for the actions of the company. How you decide to remunerate yourselves for your activities as DIRECTORS should be ironed out by SALARY levels (not dividends).
What I THINK you are trying to say is that you are 50:50 SHAREHOLDERS. In other words, you want to invest equal monetary amounts into the business. Any dividends paid out are based on SHAREHOLDINGS, not on work done, effort expended etc.
When I owned shares in various PLCs I received dividends and did precisely nothing to earn those dividends. The fact that you OWN shares is what entitles you to the dividend.
Having said that, of course, if you go down the different share class route HMRC MAY want you to explain things in a bit more details each year.
(Form 42 comes to mind)
I would say a few things though.
You cannot be 50:50 Directors. If you are both directors, you generally carry equal responsibility for the actions of the company. How you decide to remunerate yourselves for your activities as DIRECTORS should be ironed out by SALARY levels (not dividends).
What I THINK you are trying to say is that you are 50:50 SHAREHOLDERS. In other words, you want to invest equal monetary amounts into the business. Any dividends paid out are based on SHAREHOLDINGS, not on work done, effort expended etc.
When I owned shares in various PLCs I received dividends and did precisely nothing to earn those dividends. The fact that you OWN shares is what entitles you to the dividend.
Are you forming a new Ltd company together or are you merging your business into the existing?
I've seen it a few times on a transaction (mostly acquisitions) that the shareholders of the old co would receive a new class of share which would be tied to the profitability of that part of the business (or subsidiary) rather than the existing.
Surely if you had a robust shareholder agreement setting out that dividends of the A shares are determined by the profitability of X part of the business and dividends of the B shares are determined by the profits generated from Y part of the business HMRC have very little scope to attack it.
I've seen it a few times on a transaction (mostly acquisitions) that the shareholders of the old co would receive a new class of share which would be tied to the profitability of that part of the business (or subsidiary) rather than the existing.
Surely if you had a robust shareholder agreement setting out that dividends of the A shares are determined by the profitability of X part of the business and dividends of the B shares are determined by the profits generated from Y part of the business HMRC have very little scope to attack it.
The simplest way to remunerate the two of you to whatever value you like is via different salary levels, eg, bonuses based on the amount of business secured?
However, there are differing tax treatments between salaries and dividends and this needs to be thought through carefully. Perhaps it is this that is causing the confusion?
However, there are differing tax treatments between salaries and dividends and this needs to be thought through carefully. Perhaps it is this that is causing the confusion?
If you don't want to issue different share classes then you can either take salaries that reflect your contributions or, perhaps a fairer and more motivational option would be to have the same salary but to have a profit share agreement written into your contracts, based on your individual contributions.
Remember though, that there is a big difference between sales and profit, a guy selling £100,000 of product that cost £50,000 to make is just as valuable as the guy who sold £500,000 of product that cost £450,000 to make.
Remember though, that there is a big difference between sales and profit, a guy selling £100,000 of product that cost £50,000 to make is just as valuable as the guy who sold £500,000 of product that cost £450,000 to make.
Ian350 said:
However, there are differing tax treatments between salaries and dividends and this needs to be thought through carefully. Perhaps it is this that is causing the confusion?
This is definitely the issue. Tax efficiency is the main driver but I realise there comes a point where tax has to be paid. The confusion arose as two accountants stated conflicting advice!
You can have the same share class but one of you can decline to take his dividend.......for example (and in simple terms)
Shareholder 1 brings in 60k
Shareholder 2 brings in 40k
You declare a dividend of 120k but shareholder 2 declines to take 20k of his dividend...the result is that a total of only 100k is taken at the correct proportion .....the downside is it can only be a verbal agreement about taking dividend in this way
Shareholder 1 brings in 60k
Shareholder 2 brings in 40k
You declare a dividend of 120k but shareholder 2 declines to take 20k of his dividend...the result is that a total of only 100k is taken at the correct proportion .....the downside is it can only be a verbal agreement about taking dividend in this way
OP, would this relatively simple structure meet your objectives?
In your capacity as shareholders:
- each shareholder owns shares in proportion to the capital and time put in, which may not be equal but ideally 50/50.
- each shareholder is paid a dividend from net profits in proportion to shareholding
In your capacity as employees / directors:
- each director is paid an identical (low) salary
- each director is allocated a bonus based on performance / contribution to net profit
- each director can choose to receive their bonus split into cash and/or employers' pension contribution
Just make sure that you both agree in advance:
- how much you will allocate to bonuses (e.g. 50% of gross profit)
- how you will award bonuses, (e.g. pro-rata to sales, hours, or out-of-hours commitment) and
- how much of net profits you will pay out as dividends (e.g. 50% of net profit)
In your capacity as shareholders:
- each shareholder owns shares in proportion to the capital and time put in, which may not be equal but ideally 50/50.
- each shareholder is paid a dividend from net profits in proportion to shareholding
In your capacity as employees / directors:
- each director is paid an identical (low) salary
- each director is allocated a bonus based on performance / contribution to net profit
- each director can choose to receive their bonus split into cash and/or employers' pension contribution
Just make sure that you both agree in advance:
- how much you will allocate to bonuses (e.g. 50% of gross profit)
- how you will award bonuses, (e.g. pro-rata to sales, hours, or out-of-hours commitment) and
- how much of net profits you will pay out as dividends (e.g. 50% of net profit)
michael gould said:
correct......we use it all the time within our shareholder structure to maximise the tax allowances of our shareholder wives......don't see why the OP shouldn't use to alter his remuneration to suit
Now this is a situation that I have seen HMRC challenge on a client I inherited when working at a former employer.http://www.hmrc.gov.uk/manuals/tsemmanual/tsem4220...
and then
http://www.hmrc.gov.uk/manuals/tsemmanual/TSEM4225...
Eric Mc said:
Did their challenge succeed?
It sounds a bit like the Arctic Systems case.
The dividends/ waiver had already been made when the client joined us but the enquiry came in during our tenure. Our advice was that in our opinion it would be hard to defend what was clearly an artificial structure (client was higher rate, wife did very little in the business and had no other earnings. With that in mind I believe our client retracted the waiver and received the dividend, with interest on the overdue tax and a penalty. It sounds a bit like the Arctic Systems case.
mx stu said:
michael gould said:
correct......we use it all the time within our shareholder structure to maximise the tax allowances of our shareholder wives......don't see why the OP shouldn't use to alter his remuneration to suit
Now this is a situation that I have seen HMRC challenge on a client I inherited when working at a former employer.http://www.hmrc.gov.uk/manuals/tsemmanual/tsem4220...
and then
http://www.hmrc.gov.uk/manuals/tsemmanual/TSEM4225...
Eric Mc said:
That's pretty obvious.
I wanted to know their position in the company i.e. were they both a shareholder AND a director.
Our client was managing director and a shareholder in the company. It was a produce company founded by the grand parents of our client and passed down from generation to generation. I wanted to know their position in the company i.e. were they both a shareholder AND a director.
I know that\ HMRC (in the Arctic Systems case) made a big deal about the dividend arrangements PRECISELY because one of the recipients was purely a shareholder and had no other involvement in the company. They said that they would never have challenged the arrangement if the other shareholder had also been a director.
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