Tax planning: make your dividend payments before 5 April
The approaching commencement of the 50% tax rate and the phased withdrawal of personal allowances for those with income between £100,000 and £112,950 are leading those affected to consider tax planning to find potential ways to reduce the increasing tax burden. One suggestion doing the rounds is to advance dividend payments so that they are taxed in the 2009/10 tax year instead of 2010/11, according to accountancy and financial services group Smith & Williamson.
“There have been reports that HMRC may bring in last minute changes to prevent dividends being advanced to avoid tax in this way. That would be akin to retrospective legislation and therefore not an easy option for Government. In my view it is much more likely that HMRC will take a special interest in dividends paid towards the end of the tax year to check that they have been properly and legally paid. So, if anyone plans on bringing forward their payment date, put simply, they must prove that payment is made before 5 April 2010 and that it relates to profits earned up to that period. To do so they must have all of their paperwork in order,” advises Richard Mannion, tax director at Smith & Williamson.
Dividends from UK resident companies are taxed when they are “paid”. HMRC says that the date of payment should have its company law meaning.
- For company law purposes dividends are treated as paid on the date when an enforceable debt is created and where there is no such debt, the date of payment.
- The declaration of an interim dividend becomes taxable when it is actually paid.
- A final dividend becomes an enforceable debt when it is approved by company resolution.
To ensure that the taxable date for a dividend is before 6 April 2010, it is necessary to ensure payment of an interim dividend is made before that date. For a final dividend it is necessary to make sure the resolution approving the payment of a dividend on a date before 6 April 2010 is passed before that date.
In both cases, be certain that the paperwork is in order. The company’s articles of association will set out the specific requirements with respect to authorisation of dividends. While not the case for all companies, it is usual for directors to have the power to declare an interim dividend and there will need to be an appropriate board minute evidencing authorisation of such a dividend.
In the case of a final dividend the articles of association may provide for such dividends to be approved by the members in a general meeting subject to an ordinary resolution. In practice for private companies there is no need to declare a final dividend and it is possible to continue to declare and pay interim dividends and doing so should put the matter beyond doubt.
It is necessary to demonstrate the company has sufficient reserves to pay any dividend through supporting accounts. Companies must also issue tax vouchers for dividends, specifying the date of payment, the amount and the associated tax credit.
Bringing forward a dividend may not suit all shareholders as it could mean that an individual not expecting to pay tax at the 40% rate is dragged into the higher rate by the advance payment. There may be other factors to consider by increasing total income for certain individuals for 2009/10 such as the pension forestalling rules.
For further information contact:
Richard Mannion, tax director at Smith & Williamson
020 7131 4252
email Richard Mannion
PR queries:
Kate Harrison / Jess Koslow 020 7131 4228 / 4264
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Note to editors:
Smith & Williamson is an independent professional and financial services group employing about 1,500 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-to-large corporates. The group operates from offices in London, Belfast, Bristol, Glasgow, Guildford, Salisbury, Southampton, and Worcester.
Smith & Williamson Limited
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International, a worldwide network of independent accounting firms.
