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Dividends Strategies for Private Companies

Dividends Strategies for Private Companies
The key dates of 31 January and 5 April trigger the twin concerns of the payment date for tax and the end of the tax year for planning respectively.

A prime consideration around these dates will be the withdrawal of dividends from private companies.  The timing of the extraction of company profits through dividends is key for tax planning, especially with the use of the basic rate bands and trying to mitigate the 50% additional rate of income tax and the loss of personal allowances.

However, such tax planning around dividends must result in a physical extraction.  The guidance is found in HMRC’s ‘Company Taxation Manual’ (at CTM20095) (‘ACT: General: Notes on company law aspect of dividends’):

1. In the case of an interim dividend (which does not create an enforceable debt and which can be varied or rescinded prior to payment), payment is only made when the money is placed unreservedly at the disposal of the directors/shareholders as part of their current accounts with the company. So, payment is not made until such a right to draw on the dividend exists (presumably) when the appropriate entries are made in the company's books.

2. If, as may happen with a small company, such entries are not made until the annual accounts are prepared or audited, 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.

It is therefore imperative for all limited companies to review the dividend issue.  This is alongside the current trend for unincorporated businesses to seek the protection of the limited liability company, so that not only do they have legal protection, but also the ability to extract dividends which is so much more efficient than being liable to Class 4 National Insurance contributions, which can seem  punitive.

The production of up to date management accounts are a useful tool in dividend tax planning, as well as being essential when making management decisions.  To enable the maximum possible tax saving via the dividend fund extraction route it is essential that the levels of reserves available for extraction are known.  If a dividend is declared which is in excess of the reserves available it is deemed unlawful.

There is a window of tax planning opportunity available to all directors and shareholders between now and 5 April to look at the dividend situation and to ensure that if a dividend can help with tax planning that it isn’t just a ‘paper’ transaction; that it is documented correctly and it corresponds with monies drawn. 

Practical Tip :

If tax planning is carried out on, say, 4 April and just paper dividends are produced without the documentary trail of the monies actually being paid, the allowability of these dividends in an enquiry would be a serious question of debate.  Thus there exists a great tax planning opportunity - but one that should be treated with respect and not abused.


Julie Butler F.C.A.