With new dividend tax rates commencing on 6th April, many contractors will be keen to draw down dividend income from their companies during the remainder of the 2015/16 tax year. With this in mind, we look at the crucial issue of timing and when, legally, dividend payments are deemed to have been made.
As has been well publicised, from 6th April 2016 the dividend tax regime is being overhauled and the deemed tax credit is being abolished for UK dividends. Although there is going to be a £5,000 dividend ‘allowance’ introduced from 6th April 2016, in many cases these changes will lead to UK shareholders paying more tax than they would have under the old system.
For further information on the changes to the dividend tax regime, please see our comprehensive summary here.
Although everyone should take specific advice, for many contractors it will therefore be sensible to declare the highest dividend possible prior to 6th April 2016, to ensure that the dividends are taxed in the 2015/2016 tax year rather than the 2016/2017 tax year. Here we look at what you need to achieve this.
In order to be able to declare a dividend, you need to have, inter alia, profits available for distribution. This is the company’s accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.
In many cases, profits will include the revenue invoiced for work done in March 2016, even if it has not yet been paid. This potentially allows a company to declare a dividend for work carried in March 2016, even if the cash has not yet been received by the Company.
Timing of Dividend – Interim Dividend
Most private companies tend to declare interim dividends, rather than final dividends. The reason for this is simply that they only require a board/director resolution, rather than a resolution of the shareholders. However, the date of an Interim Dividend becomes due and payable, is the date that it is actually paid.
Therefore, if an interim dividend is declared on 31st March 2016, but not actually paid until 30th April 2016, then the date of the dividend will be 30th April 2016 and it will fall into the new tax regime.
This poses a problem if your clients have not paid their most recent invoices, and you therefore cannot physically pay the dividend. It may be possible to use a loan arrangement, but we would generally recommend using a final dividend structure.
Timing of Dividend – Final Dividend
A so-called final dividend is a dividend recommended by the directors, but approved by the shareholders. For a company with the Model Articles, this is set out in Article 30. This requires a board resolution and a shareholder resolution.
However, a dividend approved by the shareholders becomes a debt due on the date that it is approved, even if the dividend is not paid for another month. This provides a much stronger argument that the dividend falls under the old dividend tax regime, rather than the new tax regime (assuming that is what is desired).
Further Information and Precedent Documents
This article was provided by corporate and company secretarial experts, Elemental CoSec. If you need any further advice or information, please contact them directly. You can also find some further information on the legal requirements to declare a dividend, as well as precedent documents in their guide to declaring dividends.
The above is merely a summary of the law relating to dividends and it should not be considered to be exhaustive. It is always recommended that you take professional advice if you are in any doubt as to your position.