Paying Dividends & Salary

[Gucci]

Hope someone can help.

As the rules are set to change as of 01/04/04, if possible, I want to pay myself a dividend from the reserved profit within my Company. We will be making a small loss this year ending 31/03/04 but have a large sum of profit reserved in the P&L A/C from previous years. I have already taken a gross salary of £25,750 this year which I have paid standard rate tax & NI on. I wish to take a dividend of between £10k & £20k.

Which is the most tax efficient way to proceed?

Also, I hold 85% of the shares in the Company and a family member owns the remainder. Does the other shareholder have to take a dividend also? The other shareholder plays no part in the business and does not expect dividend payments.

[davidy]

Unless the shares are different classes, then all shareholders are entitled to the dividend.

Regarding the amount of divided and the most tax effecient way of doing things, why not talk to your accountant.

davidy

[eric mc]

The new rules come into effect on 1 April 2004. The full DETAILS of the rules will not be released until 8 April 2004 at the earliest. That smacks me as being a tad unfair, if not downright scandalous.

As your company has apparently made a trading loss, the company should not be liable to a Corporation Tax bill. As you have adequate reserves you should be able to pay the shareholders a dividend without breaking any Companies Act or tax rules. Obviously, if a dividend is paid BEFORE 1 April 2004, then the new 19% Corporation Tax charge on the distributed profits will have no bearing. I would hazard a guess (and it is only a guess at the moment) that even if the dividend was paid after 1 April, the company would still not have to pay the 19% tax.

Why?

Well, the 19% tax charge is to prevent companies exploiting the Zero % Corporation Tax rate on profits of £10,000 or less. Your company did not make a profit AT ALL. Your dividend would be paid out of old "accumulated" profits.

However, do not take this as "advice". The situation is by no means clear at the moment. Speak to your accountant.

[Broccers]

Thats an interesting post Eric. The details of the tax on dividends is still unclear to me and, I hasten to add, my accountant.

I thought the main reason for tightening things up was aimed at the non working spouses who are company directors yet still received a dividend for zero effort.

[Mark.S]

The issue with distribution to a shareholder that isn't a fee earner is a different attack, known as Section 660A.

[eric mc]

Section 660 is currently being resurrected as a "cause majeur" by the Inland Revenue (they have tackled this area on many occasions in the past). Their case is strongest when a spouse or "connected person" receives a salary for essentially doing nothing in the business or the spouse is a partner in a partnership and receives a share of partnership profits for no input into the business. However, the Inland Revenue are on dodgy ground when trying to imply that a shareholder is not entitled to a dividend. After all, a shareholder only needs to invest in the business, not work in it. Why should a spouse or connected person be treated less favourably than a total stranger? Indeed, if a partner is a "sleeping" partnerin a partnership (not necessarilly a spouse or connected person), will shares of profit allocated to him/her be deemed to be settlements under Section 660?

There is a case running at the moment and we are all waiting to see what transpires.