H.M. Revenue & Customs are focussing more and more on close companies and are looking in detail into what constitutes a settlement when share waivers are used.
How do dividend waivers work?
Dividends are paid at the same rate for each category of share and this may mean that the distribution of profits may not be made in the most tax efficient manner. If a shareholder does not want to receive a dividend he can voluntarily waive his entitlement to receive it. So far everything is straightforward.
When will H.M. Revenue & Customs enquire into the arrangement?
The Revenue will try to argue that the waiver indirectly provides funds for an arrangement of settlement. The ‘settlement rules’ are designed to prevent an individual gaining a tax advantage by diverting income to another person who is liable to tax at a lower rate.
In particular, the Revenue will challenge a situation where a company would not have had sufficient reserves to pay out the dividends to all shareholders has the waiver not been in place.
Get the details correct
In order to put yourself in a strong position should H.M. Revenue & Customs open an enquiry then ensure that: –
- A formal deed of waiver has been executed which must be signed, dated, witnessed and lodged with the company.
- The waiver must be in place before the right to the dividend arises because a waiver after payment is a transfer of income which constitutes a settlement – therefore an interim dividend must be waived before being paid.
- Court rulings in this area suggest that there should be a commercial reason for the waiver such as to allow funds to be retained in the company for a specific purpose.
- Waivers should be used sparingly and not every year or for consecutive dividends
- Ensure that the dividend declared per share times the number of shares in issue does not exceed the distributable reserves of the company.