Mark McLaughlin looks at when dividends are ‘paid’ for tax purposes in view of the increase in dividend tax rates from 6 April 2022.
Family and owner-managed company director shareholders should be re-evaluating their profit extraction strategies and undertaking remuneration planning where appropriate, in view of the increase of 1.25% in dividend tax rates from 6 April 2022.
Part of that planning should involve the timing of dividend payments. This is because individual shareholders are potentially liable to income tax on dividends paid before 6 April 2022, at rates of 7.5%, 32.5% and 38.1% (depending on whether they are basic, higher or additional rate taxpayers), as opposed to 8.75%, 33.75% and 39.35% for dividends paid from that date.
The company law requirements for dividends are not considered in this article, but of course it is essential that any dividends are lawful. Furthermore, it is important to be aware when a dividend is treated as paid for tax purposes.
The tax legislation simply states that ‘dividends are to be treated as paid on the date when they become due and payable’ (CTA 2010, s 1168). However, there is a practical distinction between an ‘interim’ and ‘final’ dividend.
What’s the difference?
Interim dividends are due and payable when actually paid. A resolution to pay an interim dividend can be varied or rescinded, so the resolution does not create a debt until the dividend is paid (Companies Model Articles Regulations, SI 2008/3229, Sch 1, para 30(1); see Potel v CIR (1970) 46 TC 658).
Final dividends are usually recommended by the directors and declared by an ordinary resolution (SI 2008/3229, Sch 1, para 30(2)). 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.
There is (at least theoretically) no restriction on the number of properly constituted dividends that may be declared each year.
Dividends and director’s loan accounts
Business owners might withdraw funds ‘on account’ of dividends being paid, resulting in an overdrawn director’s loan account, with dividends subsequently being declared to clear the overdrawn balance.
Care is needed in the case of interim dividends credited to the director’s loan account. HMRC guidance (in its Corporation Tax manual, at CTM15205) states:
‘A dividend is not paid, and there is no distribution, unless and until the shareholder receives money or the distribution is otherwise unreservedly placed at the shareholder’s disposal, for instance, by being credited to a loan account on which the shareholder has power to draw.’
However, interim dividends are often credited in a later accounting period than the directors’ resolution to pay them (e.g., when an entry is made in the company’s accounting records). HMRC adds:
‘If such entries are not made until the annual audit, not uncommon in a small company, and this takes place after the end of the accounting period in which the directors resolved that an interim dividend be paid, then the due and payable date is in the later rather than the earlier accounting period.’
Practical tip
For the avoidance of any doubt, business owners might consider the physical payment of interim dividends to shareholders by the company immediately after their declaration (and before 6 April 2022, if appropriate), possibly followed by the re-introduction of those funds to the company (with a corresponding credit to the director’s loan account).
