What is a Dividend and how can I issue one?
Over the coming weeks we are going to look at a series of frequently asked questions we receive from clients. Firstly, what is a dividend? We want to breakdown and simplify the jargon around dividends: what they are, who can issue them and how they are taxed.
When you own shares in a company there are two ways to make money. Firstly sell your shares or alternatively, you can distribute company profits to shareholders, annually, using dividends.
Who does this guidance apply to?
Ltd Company shareholders
If you are a partnership you share profits in the form of distributions, not dividends.
If you are a sole trader you share profits in the form of drawings.
Sole traders, partnerships and LLPs can’t pay dividends, because they do not issue shares.
What is a Dividend?
A dividend is a payment a Ltd company can make to its shareholders if it has made a profit.
You cannot count dividends as a business cost/expense when you work out Corporation Tax.
Your company must not pay out more in dividends than its available profits from current and previous financial years.
To pay a dividend, you must:
- hold a directors’ meeting to ‘declare’ the dividend
- keep minutes of the meeting, even if you’re the only director
For each dividend payment the company makes, you must write up a dividend voucher showing the:
- company name
- names of the shareholders being paid a dividend
- amount of the dividend
You must give a copy of the dividend voucher to each shareholder and keep a copy for your company’s records.
Tax on dividends
Your company does not pay tax on dividend payments, however for shareholders they are considered a form of taxable income and are subject to dividend tax. Tax on dividends is set by the Government and is subject to annual change. Currently dividend tax rates are the same for the whole of the UK and are payable on dividend income above your personal tax free allowance (https://www.gov.uk/income-tax-rates). There is also a tax free dividend allowance for the year (currently set at £2000).
|Dividend Income Tax bands || Tax rate on dividends over your personal allowance|
|Basic rate (£0-34,500)|| 7.5%|
|Higher rate (£34,501-150,000)|| 32.5%|
|Additional rate (over £150,000)|| 38.1%|
So, your dividends will fall into one or more of the tax bands listed above, after your personal allowance and any other income sources have been added together.
Our next blog will look further into understanding income tax and dividend calculations.
New rules from 1 April 2017
You’ll be classed as a ‘limited cost business’ if your goods cost less than either:
- 2% of your turnover
- £1,000 a year (if your costs are more than 2%)
This means you’ll pay a higher rate of 16.5%.
If you aren’t a limited cost business, continue to use your business type to work out your flat rate.
Am I a Limited cost business?
There’s a calculator available to help businesses work out whether they’re a limited cost business – if you want to use the calculator, see the VAT Flat Rate Scheme – How much you pay page
Before you start you’ll need some basic information – use the information that relates to your most recent VAT return period. If you submit quarterly returns this will cover a 3 month period. If you submit annual returns this will cover a full year. You’ll need to know:
- your relevant turnover –
- the cost of goods – goods must be used exclusively for the purpose of your business and certain goods are excluded from this test.
You’re a limited cost business if the amount you spend on relevant goods including VAT is either:
- less than 2% of your VAT flat rate turnover
- greater than 2% of your VAT flat rate turnover but less than £1000 per year
If your return is less than one year the figure is the relevant proportion of £1000. For a quarterly return this is £250.
For some businesses this will be clear, other businesses –particularly those whose goods are close to 2% – may need to complete this test each time they complete their VAT return. This is because you can move from a limited cost rate of 16.5% in one period to your relevant sector rate in another. This would happen if your costs fluctuate above and below 2%.
If you’re a limited cost trader this means that you may pay more VAT than you do on standard accounting – you may want to check to make sure the Flat Rate Scheme is still right for you.
A business has a flat rate turnover of £10,000 a quarter. It spends £260 on relevant goods.
This is more than 2% of the flat rate turnover and more than £250 so the rate they need to use is the sector rate for their business.
More information can be found at Government Flat Rate VAT notice
National living wage for workers aged 25 and over
The new National Living Wage becomes law in April 2016 for workers aged 25 and over
From 1 April 2016 workers aged 25 and over will be legally entitled to a new minimum pay rate of £7.20 per hour, called the National Living Wage (NLW).
As an employer you’ll need to check which staff are eligible for the new rates and update your payroll in time.
Welcome to our monthly tax newsletter designed to keep you informed of the latest tax issues.
We hope you enjoy reading the newsletter; remember, we are here to help you so please contact us if you need further information on any of the topics covered.
BUYING A BUSINESS? NO RELIEF FOR GOODWILL NOW
Ever since April 2002 when a limited company acquires the trade and assets of another business it has been possible to obtain a tax deduction for the goodwill and other intangible assets of the acquired business, generally in line with the accounting treatment. So, if the goodwill of the acquired business was worth say £500,000 and the directors assess the useful economic life as 5 years there would be an allowable tax deduction of £100,000 a year over the 5 year period.
The Summer Budget has blocked this deduction where the goodwill is acquired on or after 8 July 2015, although where the acquisition was prior to that date relief continues to be available. Note that the new restriction applies to goodwill and “customer-related assets” which would include client lists and customer databases. The restriction does not apply to other intangibles such as patents and manufacturing “know –how” so the allocation of the purchase price of assets in the sale and purchase agreement may have an impact on the availability of tax relief.
BUYING A BUSINESS? WHAT ABOUT CAPITAL ALLOWANCES?
Another important consideration when buying a business is tax relief for the plant and machinery of the target company. Where the shares of the target company are acquired, the new owners will inherit the tax written down value in the target company’s capital allowances pool which will normally be a lot lower than the market value of the machinery.
This is another reason why a trade and asset purchase would be preferable for the buyer, as they would acquire the plant and machinery at the agreed market value. Where fixtures and fittings within buildings are acquired it is even possible, by agreement with the vendors, to acquire those items at the original purchase price. Remember that the current Annual Investment Allowance that gives 100% relief on plant and machinery reduces to just £200,000 from 1 January 2016.
Please contact us if you are planning to buy another business as we can help you maximise tax relief on the assets acquired.
SELLING YOUR COMPANY? SHARES OR ASSETS?
The corporation tax deduction for acquired goodwill and other intangible assets that has been available to companies since April 2002 mentioned above, has meant that companies buying other businesses have generally preferred to buy the trade and assets rather than the shares in the target business. However, the vendors would normally prefer to sell their shares in the company rather than a trade and asset deal, as they would usually pay more tax – corporation tax on the sale of assets, followed by a second tax charge getting the cash out of the company. A share sale would of course, mean just 10% CGT, where the shareholder qualifies for entrepreneurs’ relief.
The change in the tax treatment of acquired goodwill for the purchaser will mean that the will be less of a conflict between vendor and purchaser as to how the deal is structured. Where the business being sold has accumulated trading losses the purchasing company may be able to take advantage of those losses, if they buy shares, whereas those losses would lapse where just the assets are acquired.
Again, please contact us if you are planning to sell your business as we can help you minimise the tax payable on the sale.
UPDATED GUIDANCE ON EMPLOYEE TRAVEL (BOOKLET 490)
HMRC have updated their guidance on employees’ travel and subsistence in booklet 490, available on the Gov.uk website. The publication provides numerous examples illustrating which journeys do and do not qualify as business journeys and are eligible for tax relief.
No tax relief is available for ordinary commuting or private journeys. Ordinary commuting is where the employee travels to their normal workplace, however, where he or she travels to a temporary workplace then the journey qualifies as business travel.
A temporary workplace is a place where it expected that the employee will work for a period not exceeding 24 months and then usually return to the normal workplace after the temporary posting. A temporary workplace can also be a place where the employee works no more than 40% of their time even where this may be for a period exceeding 24 months. So an employee working at another location for no more than 2 days a week (out of 5 days) could treat that location as a temporary workplace.
Booklet 490 also confirms that where the journey counts as a business journey then any reasonable subsistence costs such as hotels and meals would also qualify for tax relief.
COMPANY CAR ADVISORY FUEL RATES
These rates are the suggested reimbursement rates for employees’ private mileage in their company cars and are reviewed each quarter on 1 March, 1 June, 1 September and 1 December. The rates that apply from 1 September 2015 are shown below, with the previous quarter’s rates shown in brackets, if changed:
|1,400 cc or less||11p (12p)||7p (8p)|
|1,600 cc or less||9p (10p)|
|1,401cc to 2,000cc||14p||9p|
|1,601cc to 2,000cc||11p (12p)|
|over 2,000cc||21p||13p (14p)||14p|
Remember also that if you reimburse your employees the tax free amount of 45p a mile (25p after 10,000 miles) for using their own car for business purposes then 20/120ths of the above amounts can be reclaimed as input VAT by your business. For example a petrol engine car over 2,000 cc = 21p x 1/6 = 3.5p VAT a mile