Pay a dividend now to defer and reduce last year’s tax
Your accountant is finishing work on your company’s accounts. He suggests paying a dividend to cover payments your company made last tax year which will otherwise be taxed as benefits in kind. Will this cause trouble with HMRC?
A company doesn’t have to pay dividends, but when it does they will be either “interim” or “final”. As far as HMRC is concerned it doesn’t matter which are paid, both are taxable in the same way. However, the timing of a dividend can be important for tax purposes and that’s where there’s a difference between the types.
The timing differences for interim and final dividends are often misunderstood.
These are taxable when they are paid to the shareholder. HMRC considers that payment is made when the shareholder is entitled to draw the money. It doesn’t have to reach your bank to count as paid. For example, if a dividend is credited to your director’s loan account (DLA), it’s been paid. Interim dividends don’t require the approval of shareholders; the board of directors can approve them.
Whether or not a final dividend is paid depends on the results shown by the company’s accounts. They can be recommended by the directors, but must be approved by the shareholders. They are treated as paid for tax purposes when the shareholders pass the resolution approving them.
Keeping in mind the explanations above, a transaction which would otherwise count as a taxable benefit in kind can’t be retrospectively converted into a dividend, interim or final. In other words, you can’t backdate a dividend. Therefore, this seems to present a problem with your accountant’s approach.
Not backdated, but made good
In fact, what your accountant is really suggesting is that you pay a dividend now, in 2018/19, to cancel a benefit in kind for 2017/18.
Tip.This is a perfectly legitimate tactic and can be used to cancel tax on all types of benefit in kind.
In May 2017 Acom arranged and paid £4,000 for a family holiday for one of its directors. This is a benefit in kind for tax and NI purposes and Acom would usually need to report this to HMRC on Form P11D by 6 July 2018. But, when finalising Acom’s accounts to 31 March 2018, its accountant suggested paying a dividend by 6 July to cover the benefit (this could be a final or interim dividend).
Tip.Not only will the dividend reduce the tax and NI cost for the director and Acom, it will defer when the tax is payable.
Save and defer
The benefit in kind would have been taxable for 2017/18 meaning Acom would be liable to pay Class 1A NI at 13.8% of £4,000 by 19 July 2018 and the director, a higher rate taxpayer, would have to pay £1,600 tax (£4,000 x 40%) by 31 January 2019.
By covering the benefit with a dividend paid in, say, June 2018, Acom won’t be liable to pay NI and the director’s tax bill has been reduced to £1,300 (£4,000 x 32.5%) which won’t be payable until 31 January 2020. A dividend seems like a win-win move.
A dividend paid by 6 July 2018 can legitimately be used to “make good” a benefit in kind for 2017/18. This can reduce your tax bill and save your company NI. What’s more, the tax payable will be deferred by a year, i.e. from 31 January 2019 to 31 January 2020.