Tax & Accounting News

Crackdown on dividend payments

19/04/2010

Running a business through a company and taking the profits as dividends, rather than salary, is an attractive proposition for many business owners, due to the possible tax savings involved, which are likely to become greater with the new 50% income tax rate coming in later this year.

However, HM Revenue and Customs (HMRC) are taking an increasing interest in this kind of dividend, since it believes some dividend payments are illegal under company (as opposed to tax) law – for example, because there is not enough profit to cover the dividend.

If this turns out to be the case, HMRC would argue the money concerned was a loan, not a dividend, which would result in a 25% Corporation Tax bill for the company on the amount of the loan, an employer NI charge on the taxable benefit for each tax year and a benefit on the director/shareholder of 4.75% per year for each tax year the loan is outstanding.

This may result in more tax being payable overall than with a dividend, particularly if the loan is outstanding for a longer period of time.

HMRC recently challenged a company that had entered into a particular corporate structure to reduce their Corporation Tax bill, which HMRC ruled was unacceptable – but the company did not have enough money to pay back the tax. HMRC then argued that previous dividends had been paid unlawfully, and attempted to make the owners repay them in order to raise enough to cover the Corporation Tax.

Although HMRC eventually lost this case, it shows their increasing interest in ensuring dividends payments are not used to dodge tax, and the importance of making sure dividends are paid correctly.

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