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:
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)
Higher rate (£34,501-150,000)
Additional rate (over £150,000)
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.
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.
In his first Budget on 8th March the new Chancellor Phillip Hammond announced that he would level the playing field between employees and the self-employed by increasing Class 4 National Insurance Contributions (NICs) from 9% to 10% from 6 April 2018 and then to 11% from 6 April 2019.
His justification is that the self-employed are now entitled to more generous state benefits than in the past and thus NIC rate should be increased towards the 12% Class 1 NIC employee rate. Note that the flat rate Class 2 NIC contributions, currently £2.80 a week, will cease on 5 April 2018.
The chancellor stated that only the self-employed with profits in excess of £16,250 will pay more national insurance.
Tax fee dividend allowance to be reduced to £2000
The Chancellor also announced measures to limit the rise in tax-driven incorporation. The £5,000 tax free dividend allowance introduced by George Osborne will be reduced to just £2,000 from 6 April 2018. Mr Hammond claimed that many smaller owner-managed businesses have incorporated as limited companies mainly for tax reasons. Typically the director/shareholders of such businesses have paid themselves in dividends and paid less tax than similar unincorporated businesses.
Currently, once the dividend allowance has been used the remaining dividends are taxed at 7.5%, 32.5% and then 38.1% depending upon whether the dividends fall into the basic rate band, higher rate band or the additional rate. There are rumours that these dividend rates may also be increased in future years.
Although the cut in the tax-free dividend allowance is clearly aimed at owner managed companies, it will also impact on those with substantial share portfolios. Mr Hammond reminded us in his speech that the annual ISA investment limit increases to £20,000 from 6 April 2017 and that dividends on shares held within an ISA continue to be tax free
Start of digital reporting delayed for smaller businesses
The Government is committed to the “Making Tax Digital” (MTD) project which is scheduled to start in April 2018 with the first quarterly updates being submitted by the self-employed and property landlords in July 2018.
Many business owners, professional advisors and the
Treasury select committee had expressed concerns about the timescale for the introduction of MTD. The Chancellor announced that there will be a one year deferral in the start date to 2019 for self-employed businesses and property landlords with gross income below the VAT registration limit.
Changing your accounting date can also delay the start of digital reporting
Another way of delaying the start of Making Tax Digital (MTD) would be to change the year end of your business. The legislation in the latest Finance Bill specifies that MTD will apply to accounting periods commencing on or after 6 April 2018.
This means that if you currently prepare accounts to 30 April then the first quarterly update to be submitted to HMRC will be for the period to 31 July 2018. However, if you changed the accounting date of your business to 31 March then the first quarterly update would be for the period from 1 April to 30 June 2019.
Contact us to discuss the full tax implications of such an action.
Corporate tax measures
The Chancellor announced that the Government is committed to continue to have the lowest corporate tax rate of the G20 major trading nations. As already announced the corporation tax rate reduces to 19% from1 April 2017 and then to 17% from 1 April 2020.
The corporation tax rate for small and medium sized companies trading in Northern Ireland will be reduced so that such companies can compete with those in the Republic where the rate is 12.5%.
The Government is also keen to continue to encourage investment in research and development (R&D) and the Chancellor announced that the R&D tax credit claim procedure would be simplified.
Tax free childcare scheme starts April 2017
The chancellor also announced that the new tax-free childcare scheme is due to start in 2017.
The scheme will provide up to £2,000 a year in childcare support for each child under 12 where the parents save in a special account. If they save £8,000 the government will top up the account with 20% to a total of £10,000 which can then be used to pay for childcare costs.
Business rates relief for small businesses
There has been much lobbying from the small business sector to reduce business rates. The Chancellor stated that 600,000 small businesses currently benefit from small business rates relief.
He also announced that no small business that is coming out of small business rates relief will pay more than £600 more in business rates this year than they did in 2016/17.
In order to support the licenced trade from April 2017, pubs with a rateable value up to £100,000 will be able to claim a £1,000 business rates discount for one year.
Advisory fuel rate for company cars
These are the suggested reimbursement rates for employees’ private mileage using their company car from 1 March 2017.
Engine Size 1400cc or less
1600cc or less
1401 to 2000cc
1601 to 2000cc
You can continue to use the previous rates for up to 1 month from the date the new rates apply.
New VAT limits
As mentioned earlier, the VAT registration limit increases by £2,000 to £85,000 from 1 April 2017. At the same time the de-registration limit increases to £83,000.
Diary of main tax events
01/04 Corporation tax for year to 30/06/2016
06/04 2017/18 tax year begins
19/04 Final RTI FPS due by this date. Indicate that this is Final Submission for the Tax Year
19/04 PAYE & NIC deductions, and CIS return and tax, for month to 5/04/17 (due 22/04 if you pay electronically)
01/05 Corporation tax for year to 31/07/16
19/05 PAYE & NIC deductions, and CIS return and tax, for month to 5/5/17 (due 22/05 if you pay electronically)
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
1,600 cc or less
1,401cc to 2,000cc
1,601cc to 2,000cc
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