Taxman 'to inspect dividend timing'

Limited company owners are being urged to have the right paperwork to hand if they plan on bringing forward dividend payments to delay the pain of tax at 50p in the £1.



Since it was first floated, the higher rate of income tax was seen by advisors as one tax burden owner-managers could reduce by distributing profits before it takes effect on April 6.



But the tip to advance dividend payments so they are taxed in the 2009/10 tax year, not 2010/11, has also reached HM Revenue & Customs, says Smith & Williamson.



The accountancy firm's tax director Richard Mannion warned: "HMRC will take a special interest in dividends paid towards the end of the tax year to check that they have been properly and legally paid.



"So, if anyone plans on bringing forward their payment date, they must prove that payment is made before 5 April 2010 and that it relates to profits earned up to that period."



A close look by tax officials at the relevant paperwork may be the lesser evil, as HMRC could have tried to prevent dividends being advanced to avoid tax in this way, the firm said.



Yet Mannion said such a clampdown by HMRC would be "akin to retrospective legislation" and is "therefore not an easy option for government," particularly in the current political climate.



Anyone paying a dividend should be able to demonstrate that their company has sufficient reserves to make the distribution through supporting accounts.



Owner-managers in the top tax brackets were also advised that bringing forward a dividend may not be suited to all circumstances, such as where it puts someone not expecting to pay tax at 40p onto the higher rate.