Conflicting advice from accountants - dividends and pensions

[simon800]

Wondering if anyone has any input here, I've had contrasting advice from 3 different accountants so would welcome views on the situation below;

• Currently run ltd company, 2 man band; myself and co-founder
• Both have 5 x Ord shares, I have 5 x A shares, business partner has 5 x B shares (enables us to take different amounts out of the business as we please if for example I want to fill my pension for the year but he wants to take extra divis)
• Appointed spouses as shareholders under advice of current accountant, my wife has 5 x C shares business partners partner (long term gf) has 5 x D shares
• Dividends of circa £50k p/year declared on C and D shares (vs £200k/£250k odd across the Ord and A/B shares)
• Importantly the C and D shares are non voting, no rights (under advice of current accountant)

Currently looking at a new accountant for various reasons, all 3 have said share structure is a big red flag and they are baffled as to why the C and D are non voting.

Advice from accountants broadly as below;


Accountant 1

• Cancel C and D shares
• Gift partners (my wife/co directors GF) 3 of the existing A/B shares business partner and I hold each, declare dividends against A/B shares moving forward (say £16.6k p/share = £50k goes to them)
• If business partner and I want to take different amounts declare our dividends against Ord shares and can then waive right to dividend if for example I want to top up pension instead of take money out
• Can add spouses as employees and directors, and immediately transfer 3 years of carry forward into their pensions as employer contributions

Accountant 2

• Add voting rights to C and D shares, either by amendment to existing or cancel existing and issue new shares
• Continue as we are, paying out dividends as we wish to ourselves using Ord/A/B and when appropriate a proportional dividend to the C/D shares (keep divis in proportion, i.e 200k/50k is fine but 50k to us 200k to them isn't
• Can add spouses as employees and directors, but don't take the piss by using 3 years of carry forward. Pay max 40k in before end of this tax year and then 40k from next year

Accountant 3

• Get a valuation of the C and D shares, and shareholders need to pay the appropriate amount into the business for non voting shares that carry a dividend
• Then continue as we are, paying out dividends as we wish to ourselves using Ord/A/B and when appropriate a proportional dividend to the C/D shares
• Can add spouses as employees and directors, but company pension contributions should only be in proportion to tenure of directorship, so if doing it now don't put £40k in as would be reward for only 6 weeks of the tax year and would raise eyebrows

As you can see all 3 have a completely different plan of action on both the shareholder structure, and the pension contributions!

Surely there's a right and wrong rather than shades of grey when it comes to what HMRCE allow you to do or not? So who do we think is right?

[Panamax]

Accountant 1 - Avoid

Accountant 2 - Sounds more competent.

Accountant 3 - Between the two.

Why three accountants? It sounds distinctly like the outcome of informal chats on a golf course or in a pub. You need proper, paid advice to get this sorted out. The current set-up is indeed a red flag for HMRC.

If you're lucky, EricMc might be along in a while with more specific guidance.

[simon800]

Panamax said:

Why three accountants? It sounds distinctly like the outcome of informal chats on a golf course or in a pub. You need proper, paid advice to get this sorted out. The current set-up is indeed a red flag for HMRC.

We were looking for a new accountant, and rather than simply picking one we chose to meet 3 so we could decide who best to use. Our current one came to us off the back of a recommendation and we didn't do enough diligence by way of meeting others!

All 3 in my example above are proper accounting firms, and we have met with either Director level individuals from them or in one case business owner/Partner.

Thanks for your reply by the way!

[Eric Mc]

Are you looking for an accountant to give you the answer you would like to hear?

What was the original purpose of the “Alphabet Shares” structure?

[simon800]

Simply looking for one who can actually tell me what is permissible and won’t result in an unexpected tax bill! I’d have thought there’s a right and wrong but given all 3 are saying completely different things (and all 3 are chartered accounts in respectable firms) I’ve been left slightly confused….

Perhaps I’m wrong and it’s completely grey and open to interpretation? But adding someone as an employee and giving them 3 years of pension for a period during which they weren’t an employee seems unusual…

[LooneyTunes]

What exactly are they seeing as the issue with the C/D class shares? The lack of voting rights or the way in which they were awarded (and price paid for them)?

[MaxFromage]

As per Eric asking the question, we can't really answer without knowing quite a bit more about the setup and how it came to be this way. However we can already say that you should run a mile from Accountant No .1

[Eric Mc]

If I encounter a prospective client with complex shareholdings in what would normally would be simple two director/two shareholder company, I tell them to look elsewhere.

[simon800]

MaxFromage said:

As per Eric asking the question, we can't really answer without knowing quite a bit more about the setup and how it came to be this way. However we can already say that you should run a mile from Accountant No .1

Setup was purely off the back of what our existing/soon to be former accountant told us to do.

I’m not an accountant and have no accounting experience or financial education whatsoever , so when we are paying someone thousands of pounds a year for their professional advice we tend to go with it if that makes sense.

As you can imagine it was quite a surprise to hear from other accountants that our current setup is wrong.

I wasn’t aware the current setup is overly complex, but to try and explain within the realms of my limited knowledge of terminology etc;

• Ord shares existed for both directors/founders from day one
• A shares and B shares created for both directors/founders in year 7 to allow both to take differing amounts of dividends; I like to fill my pension, Co founder likes to take as much in dividends as possible so the A and B shares created to allow that to happen
• C and D shares created as accountant told us it’s the most tax efficient way to pay our partners as shareholders

Why they were created with no voting rights I have no idea, why they weren’t added as employees not shareholders again no idea - we simply took the advice of the accountant who we believed was telling us the right/best thing to do

Edit - and thanks yes, was really dubious around what accountant 1 was telling us!

Edited by simon800 on Saturday 18th February 17:19

[simon800]

LooneyTunes said:

What exactly are they seeing as the issue with the C/D class shares? The lack of voting rights or the way in which they were awarded (and price paid for them)?

Apparently the lack of voting rights is the issue from what I’ve been told….

[simon800]

Eric Mc said:

If I encounter a prospective client with complex shareholdings in what would normally would be simple two director/two shareholder company, I tell them to look elsewhere.

That’s a shame - as above I had no idea that our setup is complex. We’ve simply taken advice for years from the owner of a supposedly reputable local chartered accountancy firm. Finding out it’s “wrong” has been quite stressful, particularly with the conflicting advice as to how it can be made right.

[MaxFromage]

OP, have a read of these articles:

https://www.taxinsider.co.uk/alphabet-shares-why-u...

https://www.accountingweb.co.uk/business/finance-s...

Accountants are often split on alphabet shares. Some have no interest, others are happy to put them in place. However once in place, you set a precedent.

[simon800]

MaxFromage said:

OP, have a read of these articles:

https://www.taxinsider.co.uk/alphabet-shares-why-u...

https://www.accountingweb.co.uk/business/finance-s...

Accountants are often split on alphabet shares. Some have no interest, others are happy to put them in place. However once in place, you set a precedent.

Many thanks Max, these were helpful in deepening my understanding of things!

They seem to reinforce that we aren’t quite set up right…..but there is perhaps a bit more nuance to these things than I’d expected.

It seems simply adding voting rights to the shares/issuing new ones with voting rights solves the problem whilst the idea of constantly using waivers (suggested by accountant 1) is definitely not a good one.

[2 GKC]

Can’t see any issue with the existing set up. There’s only four shareholders; it’s hardly complex. Unusual maybe.

[MaxFromage]

2 GKC said:

Can’t see any issue with the existing set up. There’s only four shareholders; it’s hardly complex. Unusual maybe.

Apologies, but can't you see from the previous postings that there is most definitely a lot wrong with this setup? It's not just the setup, but how it's being used.

Edited by MaxFromage on Saturday 18th February 21:52

[MaxFromage]

simon800 said:

Many thanks Max, these were helpful in deepening my understanding of things!

They seem to reinforce that we aren’t quite set up right…..but there is perhaps a bit more nuance to these things than I’d expected.

Nuance is exactly it. Two companies may look almost the same, but the same setup won't work.

Unfortunately it's impossible to give advice with share schemes without knowing everything, but I expect I'd want to simplify matters and be guided by the comparison/difference between business owners (and spouses).

[2 GKC]

MaxFromage said:

Apologies, but can't you see from the previous postings that there is most definitely a lot wrong with this setup? It's not just the setup, but how it's being used.

Edited by MaxFromage on Saturday 18th February 21:52

Strange post. Do you want me to say it again?

[MaxFromage]

No thanks. If you don't understand, it's best to not comment

[Alpinestars]

From a quick glance at the situation, the settlements legislation is probably the issue with the current set up, which could mean HMRC treat any waivers which result in dividends being paid to spouse/gf as income of the founders. That’s probably why the other 3 accountants don’t like it. The suggestions seem to me to be making the position more robust from a settlements perspective, eg, by making the “spouse” shares more than just a right to dividends, eg giving voting rights.

There are different ways of doing that, hence some of the differences. However, not sure 1 works - as a gift of shares to a g/f is a disposal for CGT purposes.

2 seems sensible, with the safeguard against settlements being to give more rights to the “spouse” shares, ie, they are not just income shares, which can be a problem for settlements.

Option 3 is a different way of safeguarding against settlements, by avoiding the income being a “gift”, especially where shares don’t have voting rights. The point here is that the spouses have paid for their rights.

I have no idea about pensions, so my views don’t cover which option works from that perspective.

[bitchstewie]

Interesting thread to a PAYE employee.

So if you're simon800 are you supposed to restructure your company every time you switch accountant and the new accountant has a different take on what is and isn't allowed even if HMRC haven't changed their guidance in the meantime?

Or if HMRC come sniffing around can you point at the accountants and plead ignorance as you're not an accountant but hired a suitably qualified and reputable one to advise you so how could you be expected to know if there was anything untoward with their recommendation?