Mark McLaughlin looks at dividend payments in owner-managed companies and the importance of establishing the date of payment for tax purposes.
Many company owners find dividends a more attractive way to extract income than salary or bonus. For example, dividends do not attract National Insurance contributions.
Of course, dividends must satisfy company law requirements (which are beyond the scope of this article).
Is that final?
When considering the timing of dividends, it is important to distinguish between ‘interim’ and ‘final’ dividends.
- Interim dividends are due and payable when paid. A resolution to pay an interim dividend does not create a debt until the dividend is paid (see Potel v CIR (1970) 46 TC 658).
-
Final dividends are legally due when declared unless a later date for payment is specified, in which case they are due on that payment date.
Owner-managed and family company owners often have a director’s loan account with the company, to which dividends are credited. Care is needed. HMRC warns (in the Company Tax Manual, at CTM15205): ‘Payment is not made until such a right to draw on the dividend exists, expected to be when the appropriate entries are made in the company’s books.’
All at once?
Whilst there is some flexibility in the timing of interim dividends, difficulties can arise if the intentions of the company and its owners are unclear.
For example, in Gould v Revenue and Customs [2022] UKFTT 431 (TC), the appellant (PG) and his brother (NG) were shareholders in a family company (R). In 2015, PG decided to relocate to Jamaica. In late 2015 and early 2016, R’s financial controller recommended that R pay a dividend. However, there was some doubt about whether PG was a non-UK resident in the tax year 2015/16, so as a precaution, it was decided that PG should receive his dividend in 2016/17. NG was a UK resident and his dividend would have been taxed at an effective tax rate of 30.56% if paid in 2015/16, or 38.1% in 2016/17. Thus, the brothers’ tax planning required them to be paid the dividend in different tax years.
Minutes of a company board meeting on 31 March 2016 recorded that the directors resolved an interim dividend of £40m be declared. The minutes did not specify the payment date for the dividend. On 5 April 2016, R paid £20m to NG. On 16 December 2016, R paid £20m to PG’s bank account in Belgium. HM Revenue and Customs (HMRC) considered that PG received the interim dividend in 2015/16 (not 2016/17, when actually paid), arguing that PG was entitled to the interim dividend on 5 April 2016. HMRC argued that, by virtue of NG having been paid, PG had an enforceable debt against R requiring shareholders to be treated equally. However, the First-tier Tribunal (FTT) disagreed. The FTT also found PG had waived his right to enforce payment of the dividend at the same time as his brother; an agreement by R to pay an interim dividend to PG later amounted to consideration for PG’s waiver. PG’s appeal was allowed.
Practical tip
If the company’s shareholders would prefer dividends to be paid regularly on different dates, consideration should be given to creating an additional class of shares (e.g., ‘alphabet’ shares). Whilst the taxpayer‘s appeal in Gould was successful, FTT decisions do not set a binding legal precedent.
