Selling a business?
Restructuring your company?
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Got an HMRC tax enquiry?
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Tax planning and the work undertaken by a company secretary are closely connected. Directors of owner-managed companies often misunderstand this inter-relationship. For limited companies, there are issues relating to shareholdings and dividend payments, which can impact tax levels, depending on the way they have been allocated. Below are two scenarios highlighting how your tax bills might be impacted by poor company secretarial advice.
Most importantly, HMRC is seeking to improve its own revenue though the collection of penalties. Professional advice is essential when it comes to the issuing to shares and collection of dividends by directors as this may require the preparation of a Form 42. In addition, dividend payments must be supported by the maintenance of a dividend register, supporting vouchers, minutes and waivers. RJP have extensive experience with tax enquiry related matters and offer advice as to how to maintain good governance and compliance. In a worst case scenario, a dividend could be disallowed or a penalty imposed.
Dividend payments and shareholdings
One scenario we commonly encounter relates to the payment of dividends. We are frequently asked by clients, whether it is possible to pay dividends to individual shareholders, when a company has been established with only one share class. This is an important issue for tax planning purposes because depending on the rate of tax that the shareholder pays, he or she may elect not to take a dividend.
In these situations it is usually not possible to pay dividends selectively because each shareholder is equally entitled to any dividend declared payable. However, it is possible to waive an entitlement with appropriate paperwork in place and this can be an important detail to get right in certain situations. For example, if you and a spouse are equal shareholders, you may want to consider whether long term it is appropriate for your spouse to be automatically entitled to dividends each year. Depending on income and personal allowance, this election may be a useful tax planning strategy.
Re-designation of share capital
Another area where company secretarial services and tax planning are connected is in relation to the re-designation of share rights. This can have significant tax implications in the event of a business winding up because of the way HMRC regards the distribution of capital relating to those shares. When a company is terminated (or declared bankrupt), its assets are sold and the proceeds used to pay creditors.
Anything left is distributed to shareholders equally, presenting a potential problem. The prescribed particulars of rights attached to shares set out whether there is an entitlement to capital arising from the company upon winding up. This can result in tax implications for married couples with a limited company. For instance, if a share re-designation has been completed without the shareholders receiving tax advice, tax liabilities may have arisen on that re-designation. In addition we have seen instances where HMRC have taken the view that the husband has made a settlement to his wife with no right to capital and as a result he is required to pay tax on dividends paid in relation to her shares.
Seeking specialist company secretarial advice
The link between tax and company secretarial is an important area and we suggest that if you have any concerns, or want to ask us questions about your company secretary obligations, please get in touch. You can email our company secretarial specialist, Colette Reeves, who is ICSA qualified, at cosec@rjp.co.uk for more information.
