A progressive, South West based accountancy practice

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Out and about ‘Up North’!

  • Last week, Steve attended the AVN Advancement group workshop that launched the next stage of our development. It was good to meet up with likeminded accountants that are commited to making their clients lives better in every resect.
  • Oskar was the only apprentice to attend an AVN workshop last week. Seems we lead even the best in at least one area!

£££ Savings

  •  Steve identified tax savings of over £1m for a client looking to pass on their business next year! His first £1m saving in any single project.
  • HMRC agreed our share valuation that is a crucial part of another succession plan.
  • By reviewing a clients motor expenses and claiming for mileage, a tax saving of £800 was made.
  • By planning how a husband & wife held their investments we identified a way in which an additional £413 per month could be extracted from their company.
  • Andy helped a subcontract building firm apply for a tax clearance with HMRC, which will boost their cashflow by £8,000 per month once agreed.

AND … leading by example, Andy filed his own tax return – and got a tax refund!

Team News

Beth, our New Media Manager has just finished her final exam towards her degree. Well done for ‘staying the course’ Beth! You can now relax a little!

How do I pay a dividend?

Introduction

Director/shareholders of privately owned companies have long been able to reduce their tax and NIC bills by adopting a remuneration structure consisting of a low salary, topped up with dividend payments.

The attraction

A typical family company might make £50,000 a year in profits. At this level, the combined income tax and NIC bill would exceed £13,300. Running the business as a limited company would cut the tax on business profits to less than £8,500. The saving of over £4,800 could be used to enhance the living standards of the owner’s family, reduce the length of their working week, or provide funds for investment in the business.

So what has changed?

On 13 April 2013, HMRC announced that PA Holdings had abandoned its appeal in a complex tax avoidance case, involving the payment of dividends. It also announced that there was no change in policy towards OMBs and their dividend planning.

So that sounds OK but…..

They can still challenge dividends and treat them as remuneration if they are not voted properly.

The legal background

Dividends can only be voted from distributable reserves. These are measured using the accounting rules. It can be a particular problem in the first year of a business, if no accounts have been drawn up. How can you prove that profits have been earned before you have accounts?

Many of our clients employ us, or other bookkeepers, to keep them up to date. In this case, it is easy to prepare a simple, interim, statement, to show an up to date profit position. In fact, if the previous accounts show insufficient profits accumulated, it is ESSENTIAL to have management accounts drawn up, before a dividend is voted.

If the dividend is deemed illegal, the shareholders can be forced to repay it, and HMRC can treat the payment as a loan on which notional corporation tax (the S455 Liability) and income tax (on a beneficial loan) may be levied.

Interim vs final dividends

Most companies now pay interim dividends, which are proposed by the directors without reference to their shareholders. In private companies, there tend to be the same people, so it isn’t an issue, but it is not always the case. Interim dividends are taxed when they are paid. “Payment” in this case can mean being credited to the directors loan account, transferred to an account as requested by the director/shareholder or otherwise made available to spend (by paying down a personal credit card bill for example).

Final dividends can only be authorised by the shareholders in general meeting. They cannot approve more than is recommended by the directors (who have a duty to ensure that the company is managed prudently and in the interests of various stakeholders). As most private companies no longer hold AGMs, it is increasingly rare for final dividends to be voted. The main implication is that dividends are taxed on the date it is declared, unless a later date is specified on the resolution.

General practice

Most reward payments run on a monthly cycle, so you would expect dividends to reflect that. However, it is not always practical, or cost effective, for businesses to prepare the necessary financial reports, and hold a Board meeting to approve dividend payments on such a regular basis. In this case, dividends are usually paid, and later formalised after the company’s year end.

HMRC’s guidance

HMRC state (at EIM 42280) that, a payment cannot be earnings if there is an obligation to repay it. Furthermore, they state they “in the absence of specific evidence to the contrary, the amounts drawn do not actually belong to the director.” Problems can still arise where the later credit to the DLA is a mixed bag of dividend and/or salary/fees/bonus.

So what should we do?

Do check your Articles of Association to ensure interim (or any) dividends are allowable.

Do ensure that each dividend is properly supported with Board Minutes, vouchers and an appropriate resolution.

As far as possible, make sure you actually pay the dividend by bank transfer, rather than credit to the DLA, as this makes the payment date clear. If necessary, the cash can be reintroduced later.

Avoid dividend waivers, as thee are easily attacked under tax avoidance case law.

Remember, dividends can also be paid by the transfer of assets (“in specie” is the legal term), if cash is not readily available.

Conclusion

A low salary/ dividend top up reward package is still available for owner managers who are not subject to national minimum wage legislation. However, care is still needed to ensure dividends are properly paid and documented. Contact your adviser, or us, if you are unsure you comply. Don’t make yourself an easy target by getting the basics wrong.

 

Business Training

Steve presented to a group of students at Plymouth City College last week, on how to set up a small business. Interesting questions asked by some participants. If you want the slides, or to book Steve to talk to a group, get in touch.

In addition, Steve identified two great, free, workshops in Cornwall for a new client, just setting up in business.

Team Training

We had a brilliant Team Training Day last Wednesday! The main topics included:

  • Strategy
  • Excellent Service
  • Pricing and cash management
  • Team working
  • Strategic partnerships
  • Doing good
  • Developing Systems
  • Measuring the right things

(Basically, everything you need to be a success in business!)

Money Saving

Andy secured a VAT refund of £2,800 for a client last week. Knowing the opportunities, plus our systematic approach to even the “mundane” made sure Ian was delighted! Annual fees covered for another two years!

Congratulations!

Congratulations to our client Elixel, who won the ‘Young Business of the Year’ at the Plymouth Shopper 10th birthday celebrations at the Duke of Cornwall Hotel on Wednesday.