Small business tax efficiency
Discussion
Small business, limited company, half a dozen or so staff. Four key members of staff, one of whom owns the business, three of whom currently hold stock options. Considering the option of vesting the stock options, reducing salaries, paying dividends. This appears to offer considerable tax savings.
No-brainer? Minefield?
No-brainer? Minefield?
It would only happen with the consent of everyone involved (I'm one of the three). We would have to be paid some sort of salary to comply with the minimum wage. I think it would be hard to convince anyone otherwise than that it was being done to minimise our personal tax liabilities, but surely that's always a difficult charge to defend when people take a token salary and dividends?
Virtually impossible when the people who are being paid are just staff members.
Obviously, proprietors, owner-managers, sole shareholders etc are in a better position to justify dividends on the basis that they are genuinely taking business risks with the enterprise and controlling it as a true owner would.
If you can only justify something on pure tax-saving grounds, you will have a really hard job convincing HMRC that such payments are not just "salary" disguised as "dividends".
I think the staff would be mad to accept this as a payment policy.
If I was your accountant and you insisted on such a path I would be resigning.
Obviously, proprietors, owner-managers, sole shareholders etc are in a better position to justify dividends on the basis that they are genuinely taking business risks with the enterprise and controlling it as a true owner would.
If you can only justify something on pure tax-saving grounds, you will have a really hard job convincing HMRC that such payments are not just "salary" disguised as "dividends".
I think the staff would be mad to accept this as a payment policy.
If I was your accountant and you insisted on such a path I would be resigning.
Not sure my view is as extreme as Eric's. If the staff are going to genuinely own equity share capital of the business and the business has a capital value then not sure how HMRC would be able to contend that payment of dividends should be reclassified as salary. Granted HMRC would not like the fact that salaried staff change to being remunerated by dividend but if they are genuine shareholders, then not too sure this is too different from a regular shareholder/director of his own limited company taking the minimal salary / dividend route.
The challenge that you may have is that getting the equity share capital into the hands of the staff will crystallise PAYE and possibly NIC on the value of those shares. This is reportable on form 42 as Eric said.
What options to the staff currently hold (i.e. ordinary share capital? What % of the company? Are they EMI approved options? Were options granted when company share value was far less than current value?)
Assuming that you can legitimately have the 4 key staff (including current owner) as equity shareholers, with shares having a capital value which the recipients of those shares have either paid market value for (or been taxed on any undervalue), then why not reduce salaries to NMW levels (or less if they are all directors and there is no employment contract in place) and remunerate by dividends? Assuming of course that those individuals are happy to forego their employment contract which may have historically stated a higher salary which they would no longer be entitled to.
What I think that HMRC would really dislike is the issue of a series of shares classes for each employee (i.e. a,b,c,d,e,f,etc,etc) that have no equity rights, etc and are purely 'dividend' shares with no underlying capital value.
Feel free to PM if you don't want to go into details above.
The challenge that you may have is that getting the equity share capital into the hands of the staff will crystallise PAYE and possibly NIC on the value of those shares. This is reportable on form 42 as Eric said.
What options to the staff currently hold (i.e. ordinary share capital? What % of the company? Are they EMI approved options? Were options granted when company share value was far less than current value?)
Assuming that you can legitimately have the 4 key staff (including current owner) as equity shareholers, with shares having a capital value which the recipients of those shares have either paid market value for (or been taxed on any undervalue), then why not reduce salaries to NMW levels (or less if they are all directors and there is no employment contract in place) and remunerate by dividends? Assuming of course that those individuals are happy to forego their employment contract which may have historically stated a higher salary which they would no longer be entitled to.
What I think that HMRC would really dislike is the issue of a series of shares classes for each employee (i.e. a,b,c,d,e,f,etc,etc) that have no equity rights, etc and are purely 'dividend' shares with no underlying capital value.
Feel free to PM if you don't want to go into details above.
If you all want the same £ in dividend then don't you need to all have the same allocation (divs paid per share)?
For example say you all wanted £50k. So take 7.5k paye and rest (42.5k before corp tax) in divs, then you must all have 25% shares. If owner has more shares then div payments won't be equal.
Hope this makes sense but I may be wrong anyway..
For example say you all wanted £50k. So take 7.5k paye and rest (42.5k before corp tax) in divs, then you must all have 25% shares. If owner has more shares then div payments won't be equal.
Hope this makes sense but I may be wrong anyway..
Split (if options are exercised) would be 70:10:10:10. I believe the option scheme is approved. People joined at different times, me first 7 years ago, the others over the years since. The scheme was really about the sale of the company, but although profits are healthy, sale does not look to be on the horizon. Everyone has options on ordinary shares - the biggest issue would be that the owner would probably not want to take as much as 70% of the profits - I don't know whether it would be feasible to convert some of his shares to a class which doesn't bear a dividend.
Just to bump this, after several years. Situation is still the same, with key members of staff having earned share options in an approved scheme and which are now more than old enough to be vested without attracting NI or income tax. What would the tax implications be of vesting these? If they aren't immediately sold (as they would be if we had sold the company) how is the capital gains liability on shares in a private company calculated? Would it be disadvantageous in the event of sale to own shares rather than options under an approved scheme? Would it be more tax efficient to use profits to pay dividends rather than giving (the same) staff bonuses? Could the majority shareholder waive some or all of his dividend?
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