(Higher Rate Tax) - 2nd Share Holder / 'B' Share Holder...?

Shinds

Hello all,

This is one for those Tax experts please!

Now - When it comes to Ltd Companies, Corporation Tax and the 40% Bracket... I'm sure you've all come across this....

Where dividends can be paid to a 2nd or 'B' Share Holder in the company etc... so that the Primary Share Holder doesn't have to pay tax on anything over the £37.XXX... (Higher Rate Tax)

What I'd like to know is - How 'safe' is this option and also what are the other options available to minimise this exposure to Higher Rate Tax.

Thanks

WHA

At present, not safe at all. You may have heard of the s660 settlements legislation and the arctic systems (Jones) case (if not do a google search - there's loads of information and commentary on the web).

What the HMRC are arguing is that if the primary worker(s) are being paid less than market rate for their time and expertise, then there is an element of "bounty" if dividends are paid to anyone other than those primary workers. The test case is husband and wife where husband did all the "fee earning" work and wife did the admin - he took a low wage, thus making it possible to pay higher dividends to both H & W. HMRC arguing that dividends to W are not really "hers" and should be taxed on H. HMRC won at court, Jones' won at appeal, HMRC taking it higher later in the year. Not only is there doubt about the H&W case itself, it also may extend to "A"&"B" shares etc, depending upon what parts, if any, HMRC win in court.

So there is a lot of doubt at present. I would say that you are only "safe" if all recipients of dividends are actively participating in the company and/or have made substantial investments to buy their shares (i.e. not just issued at £1). If there is any element of the overall rewards (wages and dividends) not being proportional to the effort and expertise employed into the company, then you are at risk.

Of course, many experts think HMRC is completely wrong, so it could still turn out that different classes of shares and H&W shareholdings are OK after all. We are all waiting for the court decision, and even if HMRC lose it, there is every possibility new laws will be introduced.

Shinds

Hello all,

This one again - There must be more views and opinions on this....

Someone also suggested that one method is not to make a payment to yourself (Divend etc...) until the next tax year has started...

What would you say to this? is it Safe?

Thanks

Petmidget

I have to in the main agree with WHA on this, it is an area under great scrutiny.

You would have to spell out the situation more fully to get detailed opinion, and should you not ask your accountant for their opinion, I imagine you have one.

The Arctic case is causing serious waves in the area of income spreading by "artificial (I use that word casually) means" but as yet no conclusions have been made and IMO HMRC will lose on all fronts. But then it is likely the law will be changed to reflect HMRC opinion in at least some respects.

But in the meantime you can quite legally pay income/dividends to semi non participants if you wish, this can be achieved by B shares or dividend waiver or a variety of other means, you must just be aware that the situation could change rapidly and even have a element of back dating.

It would unfortunately seem that a principle of UK tax legislation which has been a rock for nearly 100 years "that a man may structure his affairs in anyway he sees fit to legally pay the minimum amount of tax due" is about to go out the window.

This is mainly because HMRC view is that legitimate tax planning now consitutes tax avoidance and must be stamped on. Both are perfectly legal, the latter just has dubious morality, and when the government start behaving morally maybe I will advise my clients do the same.

Andy_Davies

WHA wrote:

At present, not safe at all. You may have heard of the s660 settlements legislation and the arctic systems (Jones) case (if not do a google search - there's loads of information and commentary on the web).
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Of course, many experts think HMRC is completely wrong, so it could still turn out that different classes of shares and H&W shareholdings are OK after all. We are all waiting for the court decision, and even if HMRC lose it, there is every possibility new laws will be introduced.

The House of Lords thought HMRC were wrong in Arctic systems case too.

The HRMC's appeal is due to be heard in the next few months, but in the meantime they're still have a close look at people who arrange their affairs this way - see jonbowes comment here: http://www.shout99.com/contractors/showarticle.pl?id=39795&n=&viewmode_local=Threaded

Andy