Ltd co - pay share holders different amounts of dividends

[Wilmslowboy]

Wife and I are 50-50 shareholders in a small Ltd co (same class of shares), I’ve used it to put through the odd bit of consulting work over the past few years, collected VAT even though it fell below the threshold, never claimed non direct expenses.

There is now a modest bit of retained profit in the company, which make sense to take out as dividends.

Question is does the dividends have to be paid equally to all shareholders, even if I agree to forgo my share ?

Because of our differing PAYE positions I’ll pay 35% plus tax on my part, and she more like sub 10%.
(Pension contributions for me is not an option)


Or is the answer to transfer the majority of my shareholding to her.

[MOBB]

You can waive your dividend, not an issue

[Wilmslowboy]

MOBB said:

You can waive your dividend, not an issue

Really, for some reason I got it in my head that might not be possible.

Cheers

[Eric Mc]

You CAN waive dividends but to do so you must maintain the correct board room minutes and must be able to justify the decision on commercial and NOT tax grounds.

[akirk]

or hold different classes of shares - which then means you can pay different dividends to each class...
NB some of the requirements include not just differing in name, but in attribute / ensuring the articles allow it - but both those things can be set up to work...

https://www.lewissilkin.com/Insights/Paying-differ...

[Eric Mc]

And HMRC can develop an interest in companies that do set up differing classes of shares (often referred to as Alphabet Shares).

[Deesee]

Eric Mc said:

And HMRC can develop an interest in companies that do set up differing classes of shares (often referred to as Alphabet Shares).

Oh yes... an almost unhealthy interest!

Any pension contributions if surplus cash not required? Her?

Any expenses you could expense..?

Electric car?

Reduce her dividend

[anonymous-user]

You could just gift her your shares in the company. Then the dividend will all be hers. This assumes they are ordinary shares with full voting rights etc.

Edited by anonymous-user on Thursday 6th April 10:29

[Eric Mc]

And control of the company would no longer be yours. You may not want that. SHE may not want that.

[anonymous-user]

Eric Mc said:

And control of the company would no longer be yours. You may not want that. SHE may not want that.

Oh no, he might have to spend a whole hour setting up a new one if he was that worried about it

[akirk]

Eric Mc said:

And HMRC can develop an interest in companies that do set up differing classes of shares (often referred to as Alphabet Shares).

Seeing that company law is designed to allow different classes of shares - and while not quote this simplistic, one reason is to allow payment of different levels of dividends - exactly which bit of following the law do you think they are going to get worried by?

there are some well known cases, but they don't all tell HMRC success stories, and if done correctly then it is a valid use of shares...
https://www.taxinsider.co.uk/alphabet-shares-why-u...
https://www.accountingweb.co.uk/business/finance-s...

some interesting reading - esp. the reference to the Arctic Systems case (Jones v Garnett (HMCR) 2007)...

It is a legal approach and can be seen to be a better option than waiver of dividends - esp. if done regularly...
Like anything - take proper tax advice from someone with the insurance policy to back it up not from a crowd on the internet!

[Eric Mc]

akirk said:

Seeing that company law is designed to allow different classes of shares - and while not quote this simplistic, one reason is to allow payment of different levels of dividends - exactly which bit of following the law do you think they are going to get worried by?

there are some well known cases, but they don't all tell HMRC success stories, and if done correctly then it is a valid use of shares...
https://www.taxinsider.co.uk/alphabet-shares-why-u...
https://www.accountingweb.co.uk/business/finance-s...

some interesting reading - esp. the reference to the Arctic Systems case (Jones v Garnett (HMCR) 2007)...

It is a legal approach and can be seen to be a better option than waiver of dividends - esp. if done regularly...
Like anything - take proper tax advice from someone with the insurance policy to back it up not from a crowd on the internet!

It's all about intent.

Different classes of shares exist primarilly to allow investment in a business but with limited control of the business so that control remains with primary shareholders. There are sound economic and business reasons for this. If you can justify the varying classes of shares on a financial, control and commercial basis - you should have no problems with HMRC.

If the reason the share set-up has been put together is to "income split" for tax purposes, then HMRC MAY try to override set-up.

Just because they try does not mean that they will succeed of course (Arctic Systems is a good example of an HMRC failure) but the risk is there. It's all about how happy you are to live with the additional risk of HMRC investigations.

[akirk]

Eric Mc said:

If the reason the share set-up has been put together is to "income split" for tax purposes, then HMRC MAY try to override set-up.

fair point - and there are some obvious mistakes to make (e.g. only having dividend rights, not voting rights etc.)
but equally there are valid ways of doing it...

[AyBee]

Bluequay said:

You could just gift her your shares in the company. Then the dividend will all be hers. This assumes they are ordinary shares with full voting rights etc.

Edited by Bluequay on Thursday 6th April 10:29

Would that be ok from the consulting side of it? Would seem a bit odd to have Wilmslowboy providing services from a company owned by his wife (unless he's employed by it, which I'm guessing not)? Or would you just have to set up a new company for the next lot of consultancy gigs, rinse and repeat?

[Eric Mc]

There is absolutely no requirement for shareholders to have any sort of "employment" relationship with the company they own shares in. HOWEVER, in small owner-managed close companies, HMRC will often look at the relationships between the shareholders and the directors as it it can often be manipulated in order to reduce taxes.

[Wilmslowboy]

Thanks all, the fees are largely based on a retainer plus a potential agreed bonus (future day event), both individuals do some work a month but not full-time (I have a PAYE role elsewhere).

Looks like a waving of my dividends would not pass the sniff test by HMRC, so a better way would be for me to gift her a chunk of my shares.

[SlowcoachIII]

Out of interest, why would HMRC take an interest in who takes dividends as these aren’t related to who works for the company as ownership is separate. At which point does tax avoidance become evasion? Suppose it may come down to intent

[AyBee]

Eric Mc said:

There is absolutely no requirement for shareholders to have any sort of "employment" relationship with the company they own shares in. HOWEVER, in small owner-managed close companies, HMRC will often look at the relationships between the shareholders and the directors as it it can often be manipulated in order to reduce taxes.

That wasn't my point. My point was that I imagine there needs to be a relationship between the company and the person providing services, i.e. my wife owns Company A, I provide services to Company B, Company B pays Company A but I am not employed by, nor a shareholder of, Company A, so there is no link between the company being paid and the person providing Company B with a service.

[Wilmslowboy]

SlowcoachIII said:

Out of interest, why would HMRC take an interest in who takes dividends as these aren’t related to who works for the company as ownership is separate. At which point does tax avoidance become evasion? Suppose it may come down to intent

I imagine (yes I'm assuming and all the dangers that come with that)

We are connected persons, I would be reducing my dividends to increase hers, thereby seeking to reduce our collective tax obligation.

[Eric Mc]

AyBee said:

That wasn't my point. My point was that I imagine there needs to be a relationship between the company and the person providing services, i.e. my wife owns Company A, I provide services to Company B, Company B pays Company A but I am not employed by, nor a shareholder of, Company A, so there is no link between the company being paid and the person providing Company B with a service.

There is a relationship - she’s your wife.