Divi-waiver / s660

[SailorSam]

Would be interested to hear if anyone has any advice for us in the following situation. I've read plenty on the forum on divi-waivers but been wondering if our situation is different.

Husband and wife are both company directors and have 50% split of the shares.
Both are fee earners, his contract is inside IR35 and hers is not.
Husband's salary is greater than HRT threshold whilst wife takes minimum salary.

Can the company pay a dividend to the wife only? If a dividend waiver is used then does the s660 legislation apply?

As the husband didn't earn any of the fees that resulted in the company profit/dividend does it mean this is s660 safe?

[Clare@InTouch]

It doesn't matter who earned the money in the company, it's the dividend income from a personal viewpoint that matters.

A dividend waiver can get HMRC's attention anyway, they specifically state it's something they look for when investigating under the old section 660a, but you shouldn't have a problem provided the company had enough funds to have paid out the whole amount if it had wished to. For example if your company has funds of £20,000 and pays a dividend of £20,000 each to two people, one of whom waives their right to it, the company clearly couldn't have afforded to pay it out anyway.

Section 660a doesn't apply if you're married, read up on Arctic Systems.

Have the couple considered setting up two separate companies? It would seem an easier option.

[northernladuk]

There is an article mentioning your exact situation.

Contractor dividend waivers – best avoided

Another issue to be aware of is dividend waivers. Many contractor limited companies are husband-and-wife teams, and it is common for them to split shareholdings 50:50, which means the tax allowances of both spouses can be fully utilised.

“In the past, some shareholders have waived their rights to a dividend to enable other shareholders to benefit from a greater share of dividend income than their shareholding entitled them to,” continues Abbott. “However, since the Buck v HMRC case, if you tried to use a dividend waiver in this way, HMRC would almost certainly insist the resulting payment to a spouse or other shareholder was a ‘settlement’, does not qualify for 'spousal exemption' under the settlements legislation, and tax you accordingly.”

I would also suggest your accountant would be the best first contact when you are fiddling with tax rules as he will be much more aware of your situation. If you are having to waiver there could be something fundamentally wrong with your set up which he can advise on and change.

[malvolio]

Seriously don't understand...

If one contract is IR35 caught, that's paid out as 95% of gross less expenses. The balance - such as it is - stays in the company. The non-IR35 contract doesn't care, that's paid however you want.

So total income less (IR35 salary and taxes) less (non-IR35 salary and taxes) less (expenses and CT) leaves a profit which is shareable 50/50 as per the dividend split. Perfectly legal, perfectaly valid. So why talk about waivers?

[Craig at Nixon Williams]

I assume that you want to do this so that the wife gets their share of the income from the company through dividends and the husband gets his through salary?

An easier way of doing this would be for the husband to transfer his shares to the wife - the husband then continues to take his income as a salary, the wife gets all profits made by the company as dividends.

Hope this helps!
Craig

[Clare@InTouch]

Seriously don't understand...

If one contract is IR35 caught, that's paid out as 95% of gross less expenses. The balance - such as it is - stays in the company. The non-IR35 contract doesn't care, that's paid however you want.

So total income less (IR35 salary and taxes) less (non-IR35 salary and taxes) less (expenses and CT) leaves a profit which is shareable 50/50 as per the dividend split. Perfectly legal, perfectaly valid. So why talk about waivers?

Because the husband is already a higher rate taxpayer and doesn't want to take any dividends I assume.

[malvolio]

Because the husband is already a higher rate taxpayer and doesn't want to take any dividends I assume.

So the answer is to risk an investigation by mis-applying the rules?

If people weren't quite do so paranoid about paying legitimately owed taxes, lilfe would be so much easier...

[Wanderer]

Can the company pay a dividend to the wife only?

No, but what the company can do is declare a dividend payable to all shareholders and the husband can waive his right to a dividend.

That sounds pedantic but there is an important point here. Imagine the company has reserves of exactly £10k and two shareholders with an equal number of shares in the same class. My understanding is that the company can only declare a dividend of £5k to each shareholder because that is the total value of the reserves in the company. One shareholder can take the £5k dividend and the other can waive their right to it but that means the company can only pay out £5k and it must keep the other £5k!

The company can't pay a £10k dividend to one shareholder and nothing to the other shareholder (due to a waiver) because the company doesn't have £20k in reserves to declare as a dividend. So using waivers, technically the most a company with 50/50 shareholders could pay out to one shareholder is 50% of the reserves. This was a key point in Buck vs HMRC - the full dividend without a waiver had to be legal and payable. The Buck case was a doomed because the shareholder doing the waiver held 9,999 shares and the other shareholder held 1 but the principle is the same.

I don't know what's to stop the company immediately paying a second dividend of £2.5k per shareholder out of the remaining £5k reserves and the husband doing another waiver though. This could continue ad infinitum until the wife had taken all the reserves.so I don't know if people get away with it in practice.

If a dividend waiver is used then does the s660 legislation apply?

I don't think it does in this case anyway because there is no settlement. ie, the fee earner earned the money herself and paid herself a dividend. In fact, if the husband had NOT taken a dividend waiver then it could be argued that there was a settlement on the husband.

[Wanderer]

So the answer is to risk an investigation by mis-applying the rules?
If people weren't quite do so paranoid about paying legitimately owed taxes, lilfe would be so much easier...

Pffft. Discussing legal ways to minimise your tax liability through Generally Accepted Accounting Practice is not a crime.

[SailorSam]

So the answer is to risk an investigation by mis-applying the rules?

If people weren't quite do so paranoid about paying legitimately owed taxes, lilfe would be so much easier...

If we really wanted to dodge tax we'd declare husband outside ir35, buy the insurance and sit back. Something tells me we wouldn't be the first people to do that....