Multiple Directors with differing dividends
Multiple Directors with differing dividends
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MagicalTrevor

Original Poster:

6,481 posts

259 months

Friday 1st July 2016
quotequote all
I'll obviously seek professional advice but as it's the weekend I am hoping to appeal to the knowledge here.

Consider the situation where there are 4 Directors of a company. Let's say, for ease, that there is £400k to be distributed between them.

2x Directors want to take £20k salary and £23k dividends with the rest remaining in the company, ring fenced for later.
2x Directors want to take £20k salary and £40k dividends with the rest remaining as above.

Each Director has an equal take in the business. How would you handle this?

Thanks

worsy

6,609 posts

205 months

Friday 1st July 2016
quotequote all
Dividend Waivers, but HMRC will take an interest.

MagicalTrevor

Original Poster:

6,481 posts

259 months

Friday 1st July 2016
quotequote all
Ok, so not really recommended.

The alternatives are that we all agree the same figure (doable) and leave the surplus in the business.

Any complications with having a parent company with all the monies distributed to companies owned by the individual directors?

Company ABC Ltd - Owned by 4 directors £400k

Company A - Director A receives £100k then £20k salary, £23k dividend and the rest left in the business
Company B - Director B receives £100k then £20k salary, £23k dividend and the rest left in the business
Company C - Director C receives £100k then £20k salary, £40k dividend and the rest left in the business
Company D - Director D receives £100k then £20k salary, £40k dividend and the rest left in the business


PurpleMoonlight

22,362 posts

187 months

Friday 1st July 2016
quotequote all
Assuming they all have ordinary shares, they each swap them for equivalent number of ordinary A shares for shareholder 1, ordinary B shares for shareholder 2, etc.

Different dividends can then be paid to A, B, C & D shares if required.

Edited by PurpleMoonlight on Friday 1st July 16:39

Jockman

18,414 posts

190 months

Friday 1st July 2016
quotequote all
PurpleMoonlight said:
Assuming they all have ordinary shares, they each swap them for equivalent number of ordinary A shares for shareholder 1, ordinary B shares for shareholder 2, etc.

Different dividends can then be paid to A, B, C & D shares if required.

Edited by PurpleMoonlight on Friday 1st July 16:39
Correct. Alphabet shares as we do. Keep it simple. SET IT UP PROPERLY.

Why £20k salary? Why not £8,060?

Eric Mc

125,742 posts

295 months

Friday 1st July 2016
quotequote all
Dividends are nothing to do with directors. Dividends are paid to SHAREHOLDERS. Of course, in many small, owner managed companies, the directors are also the shareholders - but they don't have to be.

Ozzie Osmond

21,189 posts

276 months

Friday 1st July 2016
quotequote all
PurpleMoonlight said:
Assuming they all have ordinary shares, they each swap them for equivalent number of ordinary A shares for shareholder 1, ordinary B shares for shareholder 2, etc.

Different dividends can then be paid to A, B, C & D shares if required.
^^^ This. Same voting rights, different dividend rights.

AMDBSTony

1,130 posts

197 months

Friday 1st July 2016
quotequote all
Spaghetti shares are one way of doing this.

Ozzie Osmond

21,189 posts

276 months

Friday 1st July 2016
quotequote all
AMDBSTony said:
Spaghetti shares are one way of doing this.
Well, that's clear then....

AMDBSTony

1,130 posts

197 months

Saturday 2nd July 2016
quotequote all
Ozzie Osmond said:
AMDBSTony said:
Spaghetti shares are one way of doing this.
Well, that's clear then....
Alphabet shares, known as spaghetti shares, are non voting non shares. Any amount can be paid on these secondary shares which means that disproportionate amounts can be assigned.
They can be good for employees or directors as they do not attract employer nor employee NI and are taxed as per dividend rules.
Note that they can only be paid from profit made.
Will need your accountant to set them up for you.


Eric Mc

125,742 posts

295 months

Saturday 2nd July 2016
quotequote all
And HMRC are rather suspicious of them as they know they can be used to pay people in lieu of salary. In their mind, that is not what dividends are for and they can and sometimes will challenge complicated share structures which seem to have been set up expressly with this in mind.

Indeed, they actually have special sections on Corporation Tax returns and company disclosure requirements in the formal accounts forcing the directors to state categorically the make up of such structures.

don29

386 posts

235 months

Saturday 2nd July 2016
quotequote all
Do the new dividend rules make this route far less attractive than previously?

Ozzie Osmond

21,189 posts

276 months

Saturday 2nd July 2016
quotequote all
AMDBSTony said:
Alphabet shares, known as spaghetti shares, are non voting non shares.
Thanks, I can see why HMRC would take a dim view. They aren't really "shares" at all, but something else dressed up as "shares".

Eric Mc

125,742 posts

295 months

Saturday 2nd July 2016
quotequote all
don29 said:
Do the new dividend rules make this route far less attractive than previously?
The new rules do make dividends less attractive but they may still offer tax savings over salaries. However, as I keep saying, blatantly replacing salary payments with dividend payments is a sure fire way to have HMRC sniffing about your business.

And it must always be remembered that there are many circumstances when paying dividends are just not possible, or sometimes even illegal.

MagicalTrevor

Original Poster:

6,481 posts

259 months

Saturday 2nd July 2016
quotequote all
Thanks all, very helpful

Jockman said:
Correct. Alphabet shares as we do. Keep it simple. SET IT UP PROPERLY.

Why £20k salary? Why not £8,060?
It was an arbitrary figure really but £20k is a more appropriate salary, where £8k is not.
Yes, more tax would be paid but that's appropriate.

Jockman

18,414 posts

190 months

Saturday 2nd July 2016
quotequote all
AMDBSTony said:
Ozzie Osmond said:
AMDBSTony said:
Spaghetti shares are one way of doing this.
Well, that's clear then....
Alphabet shares, known as spaghetti shares, are non voting non shares. Any amount can be paid on these secondary shares which means that disproportionate amounts can be assigned.
They can be good for employees or directors as they do not attract employer nor employee NI and are taxed as per dividend rules.
Note that they can only be paid from profit made.
Will need your accountant to set them up for you.
Our Alphabet shares are fully paid up shares with FULL voting rights and written in to our Shareholder Agreement. They are exactly the same type as our old shares.

I've never heard of Spaghetti shares.

Jockman

18,414 posts

190 months

Saturday 2nd July 2016
quotequote all
Ozzie Osmond said:
AMDBSTony said:
Alphabet shares, known as spaghetti shares, are non voting non shares.
Thanks, I can see why HMRC would take a dim view. They aren't really "shares" at all, but something else dressed up as "shares".
Looks like something to avoid.

Eric Mc

125,742 posts

295 months

Saturday 2nd July 2016
quotequote all
Jockman said:
Our Alphabet shares are fully paid up shares with FULL voting rights and written in to our Shareholder Agreement. They are exactly the same type as our old shares.

I've never heard of Spaghetti shares.
The whole idea of "alphabet" shares (i.e. shares referred to as "Class A" or "Class B" etc") is that the different classes of shares denote differing dividend entitlements and different voting rights. If the the different categories DON'T allot different rights etc to the different classes of shareholders, there is little point in going down this route.
There may be very valid BUSINESS reasons why different classes of shares exist in a company - and if those reasons can be justified to HMRC, then HMRC will not have an issue.

Where HMRC gets annoyed is when it seems to them that the only or main reason the different share classes were created by the company was to avoid paying tax.

Jockman

18,414 posts

190 months

Saturday 2nd July 2016
quotequote all
Eric Mc said:
Jockman said:
Our Alphabet shares are fully paid up shares with FULL voting rights and written in to our Shareholder Agreement. They are exactly the same type as our old shares.

I've never heard of Spaghetti shares.
The whole idea of "alphabet" shares (i.e. shares referred to as "Class A" or "Class B" etc") is that the different classes of shares denote differing dividend entitlements and different voting rights. If the the different categories DON'T allot different rights etc to the different classes of shareholders, there is little point in going down this route.
There may be very valid BUSINESS reasons why different classes of shares exist in a company - and if those reasons can be justified to HMRC, then HMRC will not have an issue.

Where HMRC gets annoyed is when it seems to them that the only or main reason the different share classes were created by the company was to avoid paying tax.
Thanks as ever Eric.

The main area our Advisers highlighted were that the share amounts should not be frivolous and that they must be discarded without reservation ie, if the wife runs off you can't have them back. Full voting rights too.

In the Shareholder's Agreement you are permitted to divide into Majority Shareholders and Minority Shareholders with slightly different rules but that is the only concession I can find.

If OP goes down this route he should also undertake a sanity check on his Articles of Association to ensure compatability with them.