Dividend payments to spouse

emv

Hi

Apologies as I know this isn't a new topic but there seems to be differing advice on this in other posts & I heard on the radio that HMRC is trying to cut down on couples using limited companies as was of avoiding tax.

My question is whether dividends can be paid to my husband who currently does not draw a salary from our company. I'm the main employee & hold 67% of the shares. He does some of the admin, phone calls & book-keeping but he hasn't been drawing a salary as he has another job.

Could we be questioned about why he is getting a dividend & should we pay him a salary? We're also starting a new company which neither of us were going to draw a salary from & were going to split the dividends similarly. Will this be OK for the taxman?

Many thanks

Emmavix

fengirl_2

He can only be paid dividends if he is a shareholder - when you decide on a dividend, the same has to be paid for all shareholders. As he is genuinely doing work for the company, then I dont see the problem with paying him a salary.
If he is a shareholder of the new company, then he is entitled to dividends in the same way as all other shareholders. You might similarly hold shares in M&S, it doesnt mean you work for them! If he is not working in the new company, HMRC might well question what he was being paid for!

emv

Sorry, I forgot to say that he owns the other 33% of the shares! So he would get half the amount of dividend that I get. I had heard that HMRC could query why dividends are being paid to directors who don't carry out work for the company. It makes sense not to pay him a salary as this will incur more tax (income tax @22%) than paying corporation tax at 20% but I wasn't sure if he needed to be shown to be contributing ot the company as an employee.

theladyknows

Very new on this but think if you can provide boardroom minutes with him involved then they can't argue about his envolvement.

Pennywise

I presume the OP is thinking about the proposed "income shifting" rules that are set to be introduced in April 2008. The rules are not yet published in detail. The idea is to stop the situation where one spouse does most of the fee-earning work, yet splits the dividends between themselves and the other spouse. The rules seek to tax all the dividends on the main fee-earner. So if both spouse do a similar amount of work on the company, they can draw dividends equally and the new rules won't affect them. If one spouse "contributes" say 90% of time/effort/fee-earning/intellectual property, then the rules would require 90% of the dividends to be taxed on that person. Obviously, these ideas are fundamentally flawed, as it will be exceptionally difficult to prove who did what - there will be a lot of marginal cases where arguments could last years, but what it should do it stop the blatent cases where one spouse does very little yet receives half the dividends. Just making a note in the minutes won't work - HMRC will go a lot deeper than that and look into the real working arrangements, wanting to see diaries, etc., just like they do currently in tax investigations.

slipp_digby

This is very good advice from Pennywise which you would be wise to heed.

The big test case from memory was 'Arctic Systems' who won but HMRC have launched a challenge on this decision - I think it is still on going.

This is an exceptionally grey area and you would need good quality professional advice on this, as the consequences of getting this wrong could be a hefty back tax bill of 1,000s of pounds.

I asked my accountant the same question about my spouse and the message I got was to steer well clear.

Edit: dont understand your comments above on corporation tax and income tax.

olly300

slipp_digby wrote: »

The big test case from memory was 'Arctic Systems' who won but HMRC have launched a challenge on this decision - I think it is still on going.

The case went to the House of Lords and Artic Systems won. Therefore HMRC decided to introduce this legislation in 2008 which will unfortunately penalise family businesses and partnerships where all parties actually contribute (in the form people expect) with their efforts to the running of the bussiness but in different and complex ways.

emv

So here's another question - as we now have 2 limited companies and my husband and I are both directors of each, would it make more sense for him to own the majority of one & for him to concentrate his time on that one while I own the majority of & work mostly on the other?

[Both companies are different & we've decided to operate two because they are so different & because we will give ourselves tax-free childcare vouchers through one and the other company will employ people other than ourselves who we would also have to offer childcare vouchers to if we only opearted one]

stphnstevey

I think no one really knows what to do about income shifting

Best bet is to err on the side of caution
- Limit dividends as much as tax efficiently possible to spouses
- Document ANY work your spouse does for the business

Murphy_The_Cat

stphnstevey wrote: »

I think no one really knows what to do about income shifting

Best bet is to err on the side of caution
- Limit dividends as much as tax efficiently possible to spouses
- Document ANY work your spouse does for the business

& if at all possible, get them on the payroll, onto internal forms, training schemes, H&S schedules, vehicle insurances, etc, etc.