How to bring forward a distribution; why and where to safeguard against HMRC.
Even if a TV entrepreneur does get his way against the new dividend tax, it will still be more financially beneficial for PSC contractors to accelerate a dividend payment to before April 5th 2016, writes Anne Wilson, senior tax manager at Pierce Chartered Accountants.
All £5,000+ dividend recipients to get stung
Before elaborating on this strategy, here’s a quick refresher: from April 6th 2016 all taxpayers in receipt of dividends in excess of £5,000 will see their tax liability on dividends rise. A basic rate taxpayer will pay tax at 7.5% on dividends over £5,000; a higher rate taxpayer will pay tax at 32.5% and an additional rate taxpayer at 38.1%. This compares with current rates of 0%, 25% and 30.5%.
Revenue realises it’s the last chance
So there is now a last chance opportunity for all Owner-Managed Businesses (OMBs) such as PSC contractors to draw dividends before the current tax year finishes on April 5th 2016 and benefit from the current rates of tax. Because it is likely that many shareholders will take extra dividends in the 2015/16 tax year, HM Revenue & Customs may wish to review dividends paid late in the current tax year. If your company is one which is selected for such an enquiry, what can be done to safeguard against a challenge by HMRC?
- Firstly, decide if your company can actually pay a dividend; to be able to do this a company must have distributable reserves, otherwise a dividend cannot legally be paid. Distributable reserves are the company’s accumulated profits, which have not already been paid out – these appear on your balance sheet. Therefore if each year you have taken all the company’s profits out, you may not have reserves to pay any further dividends. You should check with your accountant who will be able to help you.
- The dividend paperwork must be drawn up correctly, so minutes and dividend vouchers should be prepared.
How much, and how many?
When considering how much in dividends to pay before April 5th, in addition to ensuring that your company has sufficient profits, you should also potentially consider the impact on the child benefit high income charge if it takes your income over £50,000 and on the loss of personal allowance if it takes your income over £100,000.
Multiple dividends can be paid to individual OMBs, but again this needs to be weighed up against the impact on child benefit (if this affects you) and the distributable reserves held by the company. If multiple dividends are to be paid, ensure all the paperwork is completed for each one – a time-consuming effort, but one that will safeguard challenges made by HMRC.
Caution and care
Of course some contractors might not have distributable reserves. If that’s you, can you still benefit from accelerating the tax liability on a payment that is treated for tax like a dividend? If you have an overdrawn loan account with the company you may wish to write this off before April 5th 2016. This is because the write-off of a loan account is, in some circumstances, taxed in the same way as a dividend. Care should be taken with this strategy, as it could give rise to a national insurance liability and advice specific to your circumstances should always be taken from your accountant before you proceed.
One final point for PSC contractors to carefully consider is that by accelerating the payment of a dividend, the tax on that dividend will be payable a year earlier. It is therefore important to ensure that provision is made to pay any liability arising on January 31st 2017. This will be the case even in the event that the dividend tax rate is more than cut in half, as Dragons’ Den success story Neil Westwood wants but is unlikely to see.