An Essential Guide to Being a Director or Shareholder & Dividends
Let me be blunt with you, I have seen many clients and potential clients try and take dividends here and there without consideration of what dividends actually are, and why that matters. You don’t get dividends from your company because you are a director, you get them if you are a shareholder of the company, which most sole company directors are, but you have to be sure of what you have done.
It is when a company has more than one director that things start getting messy in the dividend department. You might have a 50/50 shareholding, but are trying to take out different amounts of dividends due to your other taxable income. This is often the case when a couple take on a business together. They want to shareholding to be 50/50, but due to other earned income, they want one partner to receive a higher dividend holding. They often do this without thinking, and sometimes it is without even trying to gain a tax advantage (in the case of a recent client which I have spoken to about changing their shares, the wife had 40%, the husband 20% and a friend that they went into business with had 40%. None of them had more other taxable income than the others, but they took the same dividends, which is against the rules unfortunately. There are two ways around this, and both come with issues that need to be considered.
Directors & Dividends
The first is a dividend waiver. This can be used if no, or a lower value of dividends is to be paid to one shareholder with the same shareholding as the other shareholder/s. This is a legal document and needs to be prepared be a legal professional. That isn’t the only issue with dividend waivers. They are more likely to be looked at as manipulating taxable income, and like the other option below, is not allowed unless there would have been sufficient reserves in the company to pay the dividends that have been waived.
The alternate option is different classes of shares, or alphabet shares as they are nicknamed. This is the most popular with accountants and if done properly is potentially a way around the dilemma, but again it isn’t without issues or risk. Different “classes” of shares are set up by the Accountant with companies house (i.e. A class and B class). They specify what voting rights each class has, what dividend rights, and what right to remaining share capital upon winding up of the company. The important part to mention here is to make sure that those who are going to take more dividends still have full voting rights and right to capital upon winding up. There is case law of HMRC questioning these types of arrangements, as is here with a husband and wife. It was decided that because they were husband and wife and the wife (who was receiving higher dividends) still had full voting rights and rights to capital, that it was acceptable. However it was said if she hadn’t had these rights, especially also if they had not been married, HMRC would have seen this as manipulation of income for tax purposes and additional monies would have been owed to HMRC as part of this case. They also again look at whether there would have been enough reserves to pay the additional dividends in the company.
So the answer is, there is no easy answer. The safest bet is to have equal dividends for equal shares, but if you are going to do it a different way, use a professional who knows what they are doing.