Paying dividends to parents. Is this legal?

[Eric Mc]

blindswelledrat said:

No idea. I didn't even think sole traders could pay dividends. I thought they were paid out on shares of limited companies?

Absolutely correct.

Sole traders don't pay dividends. A dividend is a distribution of profits from a limited company or (in some cases) entities such as friendly societies.

The case that is being referred to is probably Jones V'Garnett (commonly referred to as the Arctic Systems Case) This was indeed a tax case regarding whether a small, owner managed company could pay what it liked to the shareholders.

In every respect, the dividends paid by Arctic Systems Ltd were perfectly legal and compliant with tax and company rules. What the Revenue challenged was whether Mr Jones (one shareholder) should pay income tax on his personal dividend only or whether he should pay income tax on the total of his dividend COMBINED with Mrs Jones'(the other shareholder) dividend.

In order to make the case that the dividend to Mrs Jones was really an attempt to reduce Mr Jones' overall income tax bill, they evoked what is referred to as the "Anti-Settlements provisions" (contained in what was Section 660A of the Taxes Act - now Section 619). Under these rules, HMRC have the power to ignore the RECIPIENT of an amount of money if they think that the recipient is being used to split income that would otherwise have been taxed in full on another person.

The important point is that HMRC LOST this case.

Note that the dividend paid to Mrs Jones was legal in every respect. There was no attempt to pretend that the dividend was being paid to anybody else.

[Shaoxter]

Eric Mc said:

Absolutely correct.

Sole traders don't pay dividends. A dividend is a distribution of profits from a limited company or (in some cases) entities such as friendly societies.

The case that is being referred to is probably Jones V'Garnett (commonly referred to as the Arctic Systems Case) This was indeed a tax case regarding whether a small, owner managed company could pay what it liked to the shareholders.

In every respect, the dividends paid by Arctic Systems Ltd were perfectly legal and compliant with tax and company rules. What the Revenue challenged was whether Mr Jones (one shareholder) should pay income tax on his personal dividend only or whether he should pay income tax on the total of his dividend COMBINED with Mrs Jones'(the other shareholder) dividend.

In order to make the case that the dividend to Mrs Jones was really an attempt to reduce Mr Jones' overall income tax bill, they evoked what is referred to as the "Anti-Settlements provisions" (contained in what was Section 660A of the Taxes Act - now Section 619). Under these rules, HMRC have the power to ignore the RECIPIENT of an amount of money if they think that the recipient is being used to split income that would otherwise have been taxed in full on another person.

The important point is that HMRC LOST this case.

Note that the dividend paid to Mrs Jones was legal in every respect. There was no attempt to pretend that the dividend was being paid to anybody else.

Very interesting, thanks.

[blindswelledrat]

Eric Mc said:

In order to make the case that the dividend to Mrs Jones was really an attempt to reduce Mr Jones' overall income tax bill, they evoked what is referred to as the "Anti-Settlements provisions" (contained in what was Section 660A of the Taxes Act - now Section 619). Under these rules, HMRC have the power to ignore the RECIPIENT of an amount of money if they think that the recipient is being used to split income that would otherwise have been taxed in full on another person.

The important point is that HMRC LOST this case.

Note that the dividend paid to Mrs Jones was legal in every respect. There was no attempt to pretend that the dividend was being paid to anybody else.

Interesting.
So which of the following was the ruling:
a) THat the Section 660a provision was unlawful or that
b)The provision was lawful but didn't apply to the current case? If not what would it's application be?

[worsy]

blindswelledrat said:

Eric Mc said:

In order to make the case that the dividend to Mrs Jones was really an attempt to reduce Mr Jones' overall income tax bill, they evoked what is referred to as the "Anti-Settlements provisions" (contained in what was Section 660A of the Taxes Act - now Section 619). Under these rules, HMRC have the power to ignore the RECIPIENT of an amount of money if they think that the recipient is being used to split income that would otherwise have been taxed in full on another person.

The important point is that HMRC LOST this case.

Note that the dividend paid to Mrs Jones was legal in every respect. There was no attempt to pretend that the dividend was being paid to anybody else.

Interesting.
So which of the following was the ruling:
a) THat the Section 660a provision was unlawful or that
b)The provision was lawful but didn't apply to the current case? If not what would it's application be?

IIRC HMRC asserted that Mrs Jones made no contribution to the business and therefore the income should be wholly Mr Jones. The court disagreed and stated that although she did not contribute to the bottom line, as husband and wife she had a material risk/investment in the business making profit.

[Eric Mc]

blindswelledrat said:

Interesting.
So which of the following was the ruling:
a) THat the Section 660a provision was unlawful or that
b)The provision was lawful but didn't apply to the current case? If not what would it's application be?

The Law Lords (it went right to the top) confirmed that HMRC were wrong to asset that S660A applied in this case.

S619 (as it is now) is still the law, but its application is not as wide as HMRC hoped.