Shareholder split and issues with accountancy firm

**Clare@InTouch** · 21 January 2014, 11:31

If you both hold normal shares then dividends have to be paid out in the proportion held, unless one shareholder waives their right to their dividend or part of it. Dividend waivers are deemed high risk in terms of S660a though, so should be used with caution. Depends who your other shareholder is.

The other way is alphabet shares, in which case different dividends can be declared on different classes.

What do your dividend vouchers show? Was there no reference to alphabet shares at the time?

**SarahL2012** · 21 January 2014, 11:36

I'm slightly confused by the post.

Are you saying that you didn't realise that dividends withdrawn from the company had to be split in line with the shareholding?

If you pay a dividend of £100k out to you and the other shareholder then the person with the 18% holding will get 18% x £100,000 and the other person will get 82% x £100,000.

**northernladuk** · 21 January 2014, 11:50

All has to be taxed at sometime. I wouldn't use the tax levels as a hard stop that then affects your way of life.

**TheCyclingProgrammer** · 21 January 2014, 12:28

I'd be less worried about the tax bill (it's not that high and you can apply to have your payments on account reduced) and more worried about the mess you've made if the dividends.

You have a degree of responsibility here, even off you've been poorly advised. That said, if the accountants were doing your dividend paperwork for you I'm surprised they didn't raise this sooner.

As has been said above, dividends have to be split according to the shareholding assuming ordinary shares and no waivers.

It's possible that your dividends could be challenged if there wasn't enough profit in the company to cover the dividends when calculated properly.

You should get the paperwork sorted and make sure as many dividend payments are correctly documented as possible and cover off the rest as directors loans if you can but you'll need to 1) pay the loan back within 9 months of your year end to avoid a corporation tax charge and 2) deal with any interest or BIK issues if the loan exceeds £5k.

**stek** · 21 January 2014, 12:33

What was the logic for bringing in another shareholder, not income shifting is it?

It does seem that way....

Thought I had managed to extract extra funds in form of tax free dividends from ltd through additional shareholder.

**kal** · 21 January 2014, 12:35

Originally posted by stek View Post

What was the logic for bringing in another shareholder, not income shifting is it?

It does seem that way....

And if the additional shareholder isn't your missus then you may well be in for it anyway...

**DirtyDog** · 21 January 2014, 12:53

Originally posted by HeadlessChicken View Post

I was informed that each shareholder can take dividends out of the company and the total of individual (dividends + salary) should be less than roughly 42K to ensure dividends are not taxed.

It would be interesting to know the exact wording of the advice. I cannot believe that an accountant said that each shareholder could just take money from the account and start drawing dividends individually.

Originally posted by HeadlessChicken View Post

Equipped with this information, I started drawing dividends for myself individually keeping my own salary in mind and trying to make sure that both (salary + dividends) combined should not breach the limit of around 42K. I applied the same rule to the other shareholder and ensured both do not cross the limit of 42K.

So what does the paperwork show? Did you generate the paperwork yourself and then send it to your accountant, or did they do it for you? When I declare a dividend, I use a spreadsheet that someone on here wrote, and it calculates the percentages for me and generates the dividend voucher and the meeting minutes. Then the company secretary signs them, I print a PDF and send it to the accountant to review.

If you were generating the paperwork correctly, then I agree that the accountant should have spotted this.

Originally posted by HeadlessChicken View Post

I was now informed that every pound dividend drawn from the company after the addition of new shareholder needs to be split 82-18%. I drew around 34K as dividends assuming this plus my salary combined did not breach the 42K limit. The other shareholder drew amount equivalent to 42K minus the salary.

Now I am told that even the 34K taken have to be split by 82-18% rule. Even the dividend withdrew by the other shareholder had to be split.

Dividends have to be paid in proportion to the number of shares that each shareholder owns. So if you own 82 shares and the other shareholder 18, then for every £100 of dividend you pay £82 goes to you and £18 to the other shareholder.

So for the £34k the company paid as a dividend, £27880 should have been paid to you and £6120 to the other shareholder. If you didn't do this, then there is an almighty mess to sort out.

Originally posted by HeadlessChicken View Post

I knew all along I was following the guidance provided to be by the (ex) accountant till the last word to make sure most tax efficient use of company funds. Still I have to pay 2200 pounds. Not being happy at all I reported the issue to new accountant; made her aware of the history and asked to suggest best course of action.

Have you got a copy of their advice in writing? I'm surprised if an accountant told you that you could pay it this way - and that is what you would need to show.

Originally posted by HeadlessChicken View Post

Unfortunately it has been all downhill from that moment on.

After a lot of email exchanges the only suggestion I got was to declare some of the dividends as loan which will bring the tax to < 1000 and remove the need to pay payments on account. I felt I deserve a refund as I've only been following the guidance provided. Getting increasingly frustrated with the way how the situation was handled I had to escalate the matter to higher management. Got some traction to no avail and the situation remains as it is with the accountancy now willing to provide back ‘financial gesture of 3 months accountancy fees’.

Adding a loan into the mix may just complicate things further - you are only going to be allowed to have £5000 before that then become a taxable benefit, and you need to account for it all carefully (or rather your accountant does). I'm not in favour of back-dating the paperwork for a large sum like this to try and make things look right. For one thing, if anyone looked at the bank statements carefully, it would be clear that it was never a loan and dividend in one payment.

If you don't think that you will be paying higher rate tax in the next year, then you can reduce the payment to nothing anyway - the danger here is that if you mess up again and owe money, HMRC will charge you interest on the sum that you didn't pay in advance.

Assuming the normal charges of an accountant, they are offering you about £350 and you have a tax liability of £1100. So they essentially paying 1/3 of the tax bill for you.

Originally posted by HeadlessChicken View Post

Deadline of 31 Jan is imminent and I am still trying to finalize my personal tax return for FY 12-13. The way how I've been treated during this issue has definitely left a gaping hole in my mind with regards to the firm’s way of handling such a trivial matter – shareholder split and how to draw funds in such situation.

At the end of the day, you are the director, so you are the one with the responsibility to make sure that you are paying things correctly. So, I'd be worried about the way that you have handled such a trivial matter - paying dividends in proportion to shareholding. It's a basic part of running a company, so really you should know how to do it.

Originally posted by HeadlessChicken View Post

Or are there others who feel they might be under the same boat? Appreciate any feedback on this matter.

My accountants have made mistakes in the past. We have resolved the issues amicably and I'm very satisfied with them. If you don't want to use them, then move to someone else - of course that someone might charge you more for sorting out this mess (particularly if there is now a directors loan in the mix as well), and you won't get any benefit of the three months free accountancy. It's up to you as the majority shareholder and director to decide what is the best course of action for your business though.

**HeadlessChicken** · 21 January 2014, 13:21

Originally posted by TheCyclingProgrammer View Post

I'd be less worried about the tax bill (it's not that high and you can apply to have your payments on account reduced) and more worried about the mess you've made if the dividends.

You have a degree of responsibility here, even off you've been poorly advised. That said, if the accountants were doing your dividend paperwork for you I'm surprised they didn't raise this sooner.

As has been said above, dividends have to be split according to the shareholding assuming ordinary shares and no waivers.

It's possible that your dividends could be challenged if there wasn't enough profit in the company to cover the dividends when calculated properly.

You should get the paperwork sorted and make sure as many dividend payments are correctly documented as possible and cover off the rest as directors loans if you can but you'll need to 1) pay the loan back within 9 months of your year end to avoid a corporation tax charge and 2) deal with any interest or BIK issues if the loan exceeds £5k.

Thanks for some useful tips.

To some degree I do agree that the issue is just not payment for FY 12-13 but sorting out paper work as well - something I was going to get corrected.

All dividends drawn were documented and declared to accountancy on a monthly bases - for 'review and record keeping'. I am talking about normal shares only.

The statement regarding 'degree of responsibility' begs a question - should I question the advice provided by accountant? None of the email conversations or documents provided at the time of introducing a new shareholder mention the need of splitting each dividend between the shareholders in accordance of the split structure. This is also something that the new accountant and senior manager reviewing the case has confirmed verbally over phone.

I do accept that my knowledge of shareholder split and dividend withdrawal has increased since the discovery of this issue. Unfortunately this has come at an expense of time and money.

Eventually I'll take this as an experience and move on but was keen to know if there are others who might be affected - as the firm serves many clients and the (ex)accountant would definitely have had many clients.

**TheCyclingProgrammer** · 21 January 2014, 13:30

Originally posted by HeadlessChicken View Post

The statement regarding 'degree of responsibility' begs a question - should I question the advice provided by accountant? None of the email conversations or documents provided at the time of introducing a new shareholder mention the need of splitting each dividend between the shareholders in accordance of the split structure. This is also something that the new accountant and senior manager reviewing the case has confirmed verbally over phone.

Always. A good accountant should be happy to answer questions. Its always useful to understand what your accountant says rather than just blindly following it; you are legally responsible, not them (unless there is some kind of gross incompetence).

The clue is in the name...shares - shareholders are entitled to a share of the profits in proportion to their shareholding unless you use things like alphabet shares or waivers to get around this.

IMO your biggest risk is having HMRC challenge the dividends if there wasn't sufficient profit to cover them. For example, say you had £10k of retained profit in the company. If you declared a total dividend of £10k then that would have been fine, as long as it was split proportionally. If you took it all for yourself, then technically that £10k should have represented 82% of the total dividend declared (with the other 18% being waived with the correct paperwork) however you would not have had enough retained profit to cover the full 100% dividend (the profit should be there to cover the other 18% even if it was waived).

The other issue is settlements legislation - its been discussed to death on here and generally the risk of being challenged is low however you have greatly increased your potential risk factor, if you retrospectively declare all of the dividends as being split between you and the other shareholder, but you've received all of the money, then HMRC could seek to apply the settlements legislation and tax the other person's dividends as if it was your income - they could challenge this regardless of your relationship with the other shareholder as you've clearly retained an interest in the income by having it all come into your bank account and presumably you've spent it.

In practice you're unlikely to get challenged IMO but the risk is there; so be very careful going forwards.

Shareholder split and issues with accountancy firm