Quarterly News

Painful extractions

Over recent years, HMRC have become increasingly interested in the company law elements of dividends. This is mainly due to the fact that running a business through a company and taking the profit as dividends can create substantial savings. Even with the proposed changes to the tax system from next year, including the 50% additional income tax rate and a corporation tax rate of 22% for small companies, there are still savings to be made.

However, if HMRC can show that the dividends are unlawful from a company law perspective at the time of payment, then they could argue that the money extracted was not a dividend but a loan. Some companies are clearly at risk where currently they are not creating the same level of profits as in recent years and yet continue to extract regular dividends.

For many owner managers, this would leave the company with a corporation tax bill of 25% of the amount taken as well as a taxable benefit for the individual for the use of the monies and Class 1A NIC for the employer.

In a recent case, the taxpayers entered into a particular corporate structure which, if it worked, mitigated the corporation tax bill greatly. HMRC said that this structure did not work. However, the companies involved did not have enough money to pay this additional corporation tax, that HMRC thought was due.

HMRC then looked back in time and saw that the owners had extracted a lot of the profit over the years as dividends. So HMRC attempted to use company law to make the owners repay the dividends, as they had been paid unlawfully; which would then have left the companies involved with money to pay the corporation tax.

HMRC won the first two rounds of this case and although they have now lost the latest round, it just goes to show how important it is for companies to ensure they have enough reserves at the time dividends are paid.

HMRC are clearly interested in this area, so if you have any concerns, please do not hesitate to get in touch.

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