From contact with our members in practice supporting owner-managed business (OMB) clients, the ICAS tax team recognises how the timing and amount of dividends is an important part of tax planning for any OMB. A dividend being declared in one tax year rather than another could impact on the applicable tax rates, the extent to which a client is paying dividend tax at the UK higher or additional tax rate, and the due date for paying income tax to HMRC, with potential impact on the client’s payments on account.

It also factors into decisions on the level of salary and dividends for business owners. But it is important to remember there is a right way to declare and pay dividends. Getting it wrong can have serious consequences – not just for the company, but potentially for advisers as well.

Getting things right

Dividends are not genuine dividends unless they are properly declared. Interim dividends must be declared at a board meeting. To be valid, per Section 830 Companies Act 2006, the directors must first give consideration to the company’s financial health, and be able to demonstrate that there are sufficient distributable profits from which a dividend can be paid.

Evidence of this must be recorded in the board minutes, with dividends correctly minuted and paid, or credited to the director’s loan account, in real time. Interim dividends are only treated as income of director shareholders when they are actually paid.

Final dividends are usually declared at the AGM and may have a specified future payment date. On declaration, they become the income of director shareholders from the date of entitlement, even if in fact paid later.

Potential risk areas

Minutes are a common area where things can go wrong. Taking account of the requirements of Section 830, the lack of minutes supporting a dividend payment could cause issues if challenged. There is a risk that no minutes means no dividend.

Take the example of a hypothetical close company where the directors are empowered to declare dividends. They decide it would be beneficial to extract money quarterly, as dividends, and to make journal adjustments to directors’ loan accounts to reflect quarterly interim dividends. But there is no contemporaneous minute showing that the directors actually considered whether the company had sufficient distributable profits to cover the dividends – or indeed any minute proving that one had actually been declared.

It is also important to consider the frequency of dividends, as the more frequently they are taken, the greater the risk that HMRC could seek to argue that they are instead salary.

What does paid mean?

Section 1168 (1) Corporation Tax Act 2010 states that dividends are treated as paid on the date they “become due and payable”. A final dividend may be paid when declared, as that is the date that the shareholder gains a legally enforceable right to the declared dividend, even if it is actually paid later. Per HMRC’s Company Taxation Manual CTM15205, “a dividend is not paid, and there is no distribution, unless and until the shareholder receives money or the distribution is otherwise unreservedly placed at the shareholder’s disposal, for instance by being credited to a loan account on which the shareholder has power to draw”. A particular danger can arise with interim dividends, since they are only deemed paid when the director shareholder can actually use them.

Ultra vires dividends

Where a distribution is made when a company lacks sufficient distributable profits, it is unlawful. The director of a close company is unlikely to be able to argue that they lacked knowledge of the state of the company’s finances here. As per Section 847 Companies Act 2006, unlawful distribution means the amount paid is not a dividend and must be repaid. Should insolvency be a possibility it is likely that HMRC will take a very serious view indeed, with directors becoming personally liable to repay the supposed dividend to the company. If the company is solvent, the sum may still require repayment, which may leave an outstanding balance on a director’s loan account, triggering a tax charge under Section 455 Corporation Tax Act 2010.

As the result of its new information-gathering powers, HMRC will have closer visibility of dividend payments from close companies. HMRC has already indicated that it will seek to use these powers to ask directors for more information on the dividends they receive from close companies on their self-assessment tax returns.

Regulatory aspects for accountants and tax practitioners

The ICAS Code of Ethics and Professional Conduct in Relation to Taxation (PCRT) cover all members of ICAS. The payment of a dividend, rather than salary, could be seen as part of tax planning, and should be read in the light of PCRT guidance at 2.29.

HMRC can impose dishonest agent penalties where it considers an agent has been dishonest with a view to bringing about a loss of tax revenue.

Under no circumstances should dividend paperwork be backdated as this could be considered fraud. Accountants and tax practitioners should never try to recreate past events, whether for tax reasons or otherwise. There is nothing wrong with effective tax planning in advance, followed by properly declared dividends after checking whether the company has sufficient distributable reserves (such as after consideration of the company’s year-end or management accounts). The dividend should be properly declared and minuted for the date of the meeting and not for a different date.

For more help, view our recent webinar

Susan Cattell, Head of Tax Technical Policy, outlines the ICAS response to significant proposals for strengthening the tax regulatory framework

HMRC issued an important consultation in March which set out the case for improving the tax advice market and outlined three potential regulatory models. It also proposed to strengthen controls on access to HMRC’s services for tax practitioners.

This was the latest in a series of consultations since 2020 on improving standards in the tax profession, following the recommendations made by the Independent Loan Charge Review.

Key points

We welcome government recognition in the consultation that the majority of tax advisers are competent and adhere to high professional standards.

We acknowledge that there is a minority of incompetent, unprofessional and unscrupulous advisers whose activities harm clients, reduce public revenue and undermine the tax advice market. We have no evidence to suggest that there are widespread concerns about the quality of tax practitioners licensed by ICAS (by reference to the lack of referrals from HMRC under the memorandum of understanding and the comparatively small number of regulatory and disciplinary orders applied by ICAS over the years). However, we recognise the need for government action to mitigate the risks to the public interest and have been calling for action for some time.

ICAS supports the first option for regulation, mandatory professional body membership for all tax agents. This would remove the uneven playing field for agents, provide a better level of protection for clients and increase confidence in the UK tax regime. In contrast to the other options, it could also be achieved in a proportionate and cost-effective way, allowing HMRC to focus its resources on its core role of running the tax system.

Scope of the requirement

We don’t agree that the requirement to belong to a professional body should only apply to those who interact with HMRC. This might make the system easier to implement, but it could reduce the effectiveness of the regime and wouldn’t address the concerns that have been identified. It could also offer opportunities to bypass regulation.

The consultation also proposes that groups of tax practitioners already subject to robust regulation would be excluded from the requirements, for example those providing legal services, licensed conveyancers and independent financial advisers. We don’t support such an exclusion because it wouldn’t produce a level playing field. Excluding parts of the tax adviser population would undermine any benefits from creating a new regulatory framework. In our view, any professional body that wanted to be a regulator for tax purposes should be required to meet the published eligibility criteria for tax regulatory bodies that will need to be put in place as part of the implementation of the new regime.

Mandatory registration of agents

We agree that any agent interacting with HMRC should have to register with HMRC, because HMRC needs to know who it is dealing with and should be able to track poor behaviour across different cases handled by an agent.

Joint response to the consultation

ICAS is one of the seven professional bodies that make up the Professional Conduct in Relation to Taxation (PCRT) group. PCRT is a code setting out the principles and standards of behaviour that all members, affiliates and students of the PCRT bodies must follow in their tax work.

The group has submitted a joint response to the consultation, supporting the first option (mandatory membership of a professional body), if it is appropriately designed and scoped. This option builds on work the group has done to drive high standards through developing and embedding PCRT within our membership. Using existing mechanisms for monitoring and enforcement is likely to be the least costly and least disruptive approach for those who already meet high standards.

The response also calls for the potential costs of the proposed regime to be quantified. Any increased costs need to be proportionate to the identified shortcomings in the existing tax advice market.

Read the responses from ICAS and the PCRT group in full

Recent developments to high income child benefit charge

Chris Campbell CA, Head of Tax (Tax Practice and Owner Managed Business Taxes), explains how HMRC pressure led to the family home being sold to pay an unexpected liability, most of which was not due.