Dividend myth, Interest received by estates, Share loss relief

The changes in the taxation of dividends and interest from 6 April 2016 have shaken up practice in those areas, and given birth to a few myths. We debunk one of the dividend myths, and outline a new HMRC extra-statutory concession which may ease administration for deceased’s estates. We also look at share loss relief claims which are regularly challenged by HMRC.

This is an
extract from our topical tax tips newsletter dated 5 May
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Dividend myth 
We came across a dangerous idea on Linked
in last week concerning the backdating of dividends to avoid the dividend tax that applies from 6 April 2016. The writer suggested that if a dividend is paid within nine months of 5 April 2016 it could be treated as a dividend for 2015/16. This is of-course total nonsense. [Since publishing our newsletter the article on Linkedin has been revised]

To be clear: a dividend can’t be backdated. Under company law the dividend must be approved by the directors and paid out at some point after that vote. There is no time limit on the period in which the dividend must be paid out after approval. In deed the dividend need not be paid in cash, it can be credited to the shareholder/ director’s account within the company. 

However, the dividend is taxed at the date it is paid to the shareholder or credited to the shareholder’s account within the company, not by reference to the date it is declared and voted on. 

If a dividend was approved before 6 April 2016, and paid out after that date it would be taxed in 2016/17 not in 2015/16 and it would be subject to the dividend tax. The only way that a cash dividend received in 2016/17 escapes the dividend tax is if it was credited to the shareholder/ director’s account within the company before 6 April 2016, and the individual then drew from that account an amount equivalent to the dividend. 

The company must have distributable reserves at the time it approves the dividend. The ICAEW provides a useful factsheet on distributable reserves, which has been updated for the FRS 102 financial reporting regime. The directors must obey company law and ensure they are not paying a dividend out of capital. The decision to approve a dividend should be based on relevant accounts, not simply on cash balances in the company’s bank account. 

If the company does not have distributable reserves any dividend declared will be illegal, and any shareholder who receives such a dividend will be obliged to repay it to the company. This was explored in the insolvency case: It’s a Wrap(UK) Ltd v Gula & another. HMRC tend to treat illegal dividends as earnings under ITEPA 2003, s 62, or alternatively as a director’s loan, if the amount is repaid to the company eventually. 

 
This is an
extract from our topical tax tips newsletter dated 5 May
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>


Dividend tax, CIS and payrolled benefits, Warning about tax avoidance schemes

The 2016/17 tax year will see the introduction of new tax on dividends, and the elimination of more paper tax return forms, this time for CIS. We have advice on how to talk to clients about both of these changes. You may also want to discuss payrolling of benefits, and the latest warnings from HMRC about tax avoidance schemes. 

This is an
extract from our topical tax tips newsletter dated 11 February 2016
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Dividend tax 
We explained the mechanics of the new dividend tax in our newsletter on 20 August 2015, but that was before the draft Finance Bill was published on 9 December 2015. We now have a better idea of who will be affected, and which clients you need to talk to before 6 April 2016.

Company owners 
Shareholder/directors may want to advance a dividend payment into 2015/16 to save the additional 7.5% dividend tax that will payable on the same dividend in 2016/17. However, you need to work with each client to ensure they won’t lose their personal allowances in 2015/16 (income over £100,000), or have their child benefit clawed-back (income over £50,000). 
  
The company must also have the distributable profits available to pay the accelerated dividend, so you may need to draw up management accounts to prove there are adequate profits. 
  
Some PAYE coding notices issued for 2016/17 include an estimated amount of tax in respect of the 7.5% dividend tax. It makes sense for HMRC to collect the extra tax due through PAYE rather than wait until the balancing amount of SA tax is paid on 31 January 2018. You should discuss with your client whether the level of estimated tax is reasonable and in line with the dividends they expect to receive in 2016/17. 
  
Basic rate taxpayers 
Shareholders with income within the basic rate band may not complete an SA tax return, as there currently is no additional tax to pay on their dividend income. If those shareholders receive more than £5,000 of dividends in 2016/17 there will be tax to pay, and they will have to register for self-assessment. Check the tax profile of the non-director shareholders in your family company clients, who don’t currently file an SA return.     
  
Generous donors 
The dividend tax credit is counted as part of the tax paid in respect of donations made under gift aid. When the dividend tax credit disappears on 6 April 2016 taxpayers need to check that their total tax bill actually covers the tax they have declared they pay when making gift aid donations. Those same taxpayers may also receive significant amounts of interest taxed at 0% from April 2016, so their total tax bill may be close to zero.

This is an
extract from our topical tax tips newsletter dated
11 February 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>


Dividend tax and allowance, Incorrect P11D penalty letters, VAT advice

Since the Summer Budget small company owners and their accountants have been worrying about the proposed new dividend tax and allowance. HMRC has just released some brief guidance on these proposals, which changes our understanding of how they will work, as we explain below. We also have warnings about incorrect P11D penalty letters and where to source your VAT advice. 

Dividend tax and allowance 
From 6 April 2016 the taxation of all dividends received by individuals will change significantly – pension funds, ISAs and companies will not be affected. There are still outstanding questions about the taxation of dividends received by trusts and non-resident individuals. 

There are three key facts to understand about the new dividend tax regime: 

1. The cash amount of dividend received will be the amount subject to tax – there will be no grossing up for tax purposes. 
2. The first £5,000 of dividend income per year will be taxed at 0% – whatever income tax band it falls into. 
3. Dividends received in excess of £5,000 will be taxed at 7.5%, 32.5% or 38.1%, depending on whether they fall into the basic, higher, or additional rate income tax band. 

The HMRC factsheet on the dividend allowance explains how this “allowance” will apply. It won’t work like the personal allowance, which was the impression given by the Summer Budget announcement, it will be a zero tax rate. 

Dividend income will be taxed as the highest slice of income (as now), so it will fall within the highest tax band for the taxpayer. However, within that tax band the first £5,000 of dividends will be subject to tax at 0% rather than at the rate applicable to dividends.  

Example 

In 2016/17 Harry takes dividends of £60,000 from his own company, but no salary. The personal allowance is £11,000 and basic rate band: £32,000.
Income
Tax payable
Dividend received
£60,000
£
Personal allowance
(11,000)
49,000
Basic rate band :
(32,000)
Dividend ”allowance”
5,000 @0%
0
Residue of basic rate band
27,000 @7.5%
2,025
Higher rate band:
17,000
17,000 @32.5%
5,525
Total tax payable:
7,550

It is possible that the dividend “allowance” – or zero rate for dividends – to give it a more accurate name, will fall into two income tax bands, as is illustrated in example 6 in the HMRC factsheet.  

The total amount of dividend income received will count as part of the taxpayer’s net adjusted income when calculating whether the £100,000 threshold for withdrawing the personal allowance is breached. Also parents need to count all their dividend income to test whether the £50,000 threshold for the high income child benefit charge is breached. Although the dividend income included in those calculations is the amount received, not a grossed-up amount.

This is an
extract from our tax tips newsletter dated 20 August 2015
(5 days before we publish an extract on this blog). Try it
for free by registering here>>>

Last week’s newsletter contained links to related source material for this story and the
other two topical, timely and commercial tax tips. Published weekly since 2007, every week it’s clearly written
and focused on precisely what accountants in general practice need to know about that week.