Exchequer Weblog

Dividends do not carry a NI charge for the paying company or for the recipient. Paying a dividend can thus be more tax efficient than paying a salary, but this can only happen if the employee is also a shareholder in the company. However, it is not that easy to transfer shares into an employee’s name without incurring a tax charge.
Where an employee or director receives shares in the company they work for, the value of those shares and any dividends paid on those shares will normally be taxed as part of their salary, unless a number of very strict conditions are met. One exception is where the employee receives shares as part of a family or domestic arrangement, such as a gift between father and son, or between spouses.

This is a very complex piece of law and it has not been fully tested in court. However, the bottom line is HMRC do have the power to tax dividends as salary where tax avoidance has been involved.

If you would like your employees to own a slice of your company, even a very small slice, the best way to award shares in the company is through an approved share scheme, or an approved share option scheme. There are a number of types of approved share schemes, but some are quite complex to set up and administer.

The Enterprise Management Incentive share option scheme is designed for small companies with a balance sheet value of less than £30 million. This scheme allows the company to grant employees options to acquire shares at a particular value, within a set time period. It does not need prior approval from the Tax Office, but you do need to agree a value for the share options. Once the options are granted to the employees the company must tell the Tax Office within 92 days.

Where you find an error in your VAT records, which has already been included in the figures reported on a VAT return, don’t panic. You can correct that error on your next VAT return, as long as the net error amounts to VAT due of less than £10,000, or less than 1% of your quarterly turnover (subject to a £50,000 cap). If the net error is larger than this you need to write to the Tax Office setting out what went wrong and how you have corrected the problem. We can help you with this.

Correction on the VAT return is the best and quickest option for most small errors. If the Tax Inspector looks in detail at your VAT return you may have to pay interest on the delayed VAT payment and a small penalty.

However, the interest rate currently used by HMRC is only 2.5%, due to rise to 3% in September. The penalty for an error that has been correctly voluntarily is a maximum of 30% of a nominal interest figure set at 5% of the delayed VAT payment.
For example: If you correct an error of VAT underpaid of £9000 after six months, the maximum penalty will be £67.50: £9,000 x 5% x 30% x 6/12 = £67.50.

A dividend may be ‘illegal’, in that it is contrary to Company Law, when the proper procedures are not followed. If the Taxman examines the paperwork and decides the payment from your company was not a legal dividend he may treat the amount paid as a loan, or even as a bonus payment.

In both cases additional tax may be due from the company and sometimes from you.
To pay a legal dividend it is not sufficient just to write ‘dividend’ on the cheque stub or against the entry in director’s loan account.
We recommend following these steps when paying dividends…

1. The directors should first review the profits available for interim dividends. This is not the same thing as funds in the bank account, as you have to take account of other assets and liabilities. Those deliberations should be recorded as a formal board minute, so if the Taxman ever asks, you can prove the profits were there when the decision to pay an interim dividend was made.
2. If the final accounts for the year are complete and show the accumulated profit and loss account is positive, the directors can recommend the profits, which are not required for investment, can be paid out as a final dividend to the shareholders. The shareholders can either accept the directors’ recommendation or suggest a lower figure of dividend. Both these decisions also need to be properly recorded at the time they are made.
3. Dividend vouchers need to be prepared when either a final or interim dividend is paid, for each shareholder showing the total due, the tax credit attached to the dividend and the date of payment.
4. The dividend should be paid. The payment can be transferred from the company’s account by cheque or bank transfer into the shareholder’s own bank account. If the shareholder is a director his account in the company books may be credited with the dividend due to him or her, but this needs to be done as soon as possible after the decision to pay a dividend is taken.

If you live in the UK you should declare on your UK tax return all of the interest you receive from investments and deposit accounts situated anywhere in the world. This applies even if you don’t transfer that income into the UK. Individuals who have non-domicile status (normally not born in the UK), can apply to use what is called the ‘remittance basis’, and in those few cases the off-shore interest does not have to be included on their UK tax returns if it remains outside of the UK.

The Taxman has a campaign to track down everyone who has held an offshore bank account or investment, and who has not reported the income as they were required to do so. A larger number of foreign banks, including the most secretive banks in Liechtenstein, have been forced to provide lists of account holders to the UK Tax Office. The accounts on this list include trustee accounts, bond accounts and all types of current and investment accounts.
The bank is required to provide the dates for which the account was open, the name and date of birth of the account holder, the balance at 31 March each year, and detailed transactional information for certain periods.

If you had an offshore bank account at some point in the past, which you forgot to include on your tax return, you can now come clean. From 1 September 2009 you can tell the Taxman you want to declare your offshore interest.
You can do this through the HMRC website, or by phone. Once you have made this initial approach you will be given a reference number, which you need to include on a detailed declaration. HMRC will also be looking for tax on the underlying capital where that came from an undeclared taxable source.

The full declaration must be submitted by 12 March 2010.

If you use this time to come clean to the Taxman, you still have to pay all of the tax and interest due, but the penalty for failure to disclose in earlier years will be limited to 10%. Although where the bank was a branch of one of the main UK banks the penalty may be 20%, as you could have disclosed this interest two years ago, under a similar scheme that ran in 2007. In normal circumstances the penalty can be up to 100%!