Taxation of UK Dividends

[RJS]

Hi

I would be grateful if somebody could please clarify what should be a really simple query relating to UK dividends.

For dividends received in the 2015 - 2016 tax year, were these paid gross by the companies making the dividend payments, or were they subject to any tax deduction at source?

My understanding is that UK dividends were paid gross without any tax deducted, as the taxation of dividends is dealt with by the recipients, typically via a tax return. One UK company however from whom I received dividends in the last tax year has stated that they deducted 10% tax prior to the dividend being paid. For example, a declared dividend was £60.00, but only £54.00 was paid after the 10% tax deduction by the company.

Other UK companies tell me that no such tax deductions were made from their dividend payments in the same tax year, so for the same example a declared dividend of £60.00 would have been paid as £60.00.

So my question is which is right?

Any help would be most appreciated.

[Lambs]

R,

In essence, I think all companies are correct.

In 2015/16, dividends were deemed to be paid net of a 10% tax credit. The company did not physically deduct any tax, but your £90 dividend was deemed (for tax purposes only) to be a £100 dividend, net of £10 tax.

From an Income Tax perspective, the gross dividend is £100. In terms of actual cash, £90. Many companies would say that they declared a dividend of £90 - being the amount physically paid out. Few would say that they had paid a dividend of £100. But the voucher may well say that there was a gross dividend of £100, with a £10 tax credit. So confusion arises because those who know how the tax credit system works would not be too fussed about whether or not they were talking about a £90 cash dividend, or a £100 gross dividend. Those who do not, don't understand the apparent discrepancy.

This no longer applies for UK resident individuals: dividends paid on or after 6 April 2016 (i.e., for 2016/17 tax year onwards) are paid with no tax credit, so a £100 dividend is a £100 dividend is a £100 dividend. Simply put, the abolition of the tax credit is making UK dividends significantly more expensive for UK resident taxpayers.

I hope this makes sense.

Kind regards,

Lambs

[RJS]

Hi Lambs

Thank you for your reply.

One particular company pays fixed dividends of 6% per share. During the last tax year, instead of paying these as a 6% dividend, they paid them at 5.4% and stated that 10% basic rate dividend tax had been deducted. This tax year however, they are paying these same fixed dividends at 6% per share with nothing deducted. This seems to suggest that they were actually deducting 10% from the declared dividends in the last tax year.

Other companies who paid similar dividends in the last tax year have told me that they did not deduct any dividend tax from their dividend payments, and this tax year the dividends received have been unchanged.

In the 2015 - 2016 tax year I therefore appear to have received some dividends 'net' with 10% basic rate dividend tax already deducted (as stated by the company which paid them) and others 'gross' with no such tax deductions.

This is making it slightly difficult for my tax return because if I total up all dividends received in the 2015 - 2016 tax year, the calculation would apply to all dividends, regardless of the fact that some had already apparently had 10% tax deducted at source.

I do find this situation a bit odd. I queried it with the company which stated that it had made the 10% basic rate dividend tax deductions, but they say they have acted correctly. The other companies which did not make tax deductions from dividend payments say they were correct in paying dividends with no such tax deductions.

Any further help with this would be appreciated.

Regards

RJS

[bd6759]

I queried it with the company which stated that it had made the 10% basic rate dividend tax deductions, but they say they have acted correctly.

There is no such thing as a dividend tax deduction. The correct situation is actually the reverse. There is a notional tax credit added to the dividend.

[Lambs]

I broadly concur, although arithmetically it may seem pedantic, it clearly does make a difference in your case since the company that is saying that it has made a 6% dividend payment while in fact paying 5.4% is clearly talking cobblers.

It is only Income Tax legislation that deems (deemed up until and including 2015/16, at least) there to be a tax credit, which is in turn available to certain payers of Income Tax. (ITTOIA 2005 s 397; similar provisions in terms of companies in receipt of exempt distributions in CTA 2010 s 1109 but in both cases the tax credit attaches to the RECEIPT of dividend income, and in relation to the RECIPIENT's tax liabilities - the tax credit does not attach to the payment by the company, but to its receipt by the "right kind of person"). It does not feature in company law, so far as I am aware. In other words, the company cannot claim the 10% as part of its payment since the 10% tax credit does not exist except in the hands of the recipient.

If I have read your posts correctly, (and there is every chance I have not - I have something of a reputation in that regard), then this is not a tax matter but a company law / payment issue, whereby the company appears to have paid too little of a distribution. There may be a saving in the company's small print in that it may say "6% deemed gross by reference to any tax credit attaching thereto" or similar but failing that, I think you and your fellow shareholders are owed the difference.

I trust this makes sense.

With regards,

Lambs

[RJS]

Thank you bd6759 and Lambs.

I absolutely agree with you both. I am certainly no expert in these matters, but I have researched this issue to some extent and as a lay person I believe I have a reasonable understanding of how dividends were meant to have been paid to shareholders, and how the notional dividend tax credits applied in the previous tax year(s).

It is my belief that the company which has very clearly stated that they deducted 10% as 'dividend tax' from annual fixed dividends prior to their payment to shareholders in the last tax year has not acted properly, and the annual fixed dividends have been paid without any such deductions this tax year. So, last tax year, £60.00 dividends were paid as £54.00 dividends, but this tax year the £60.00 dividends are being paid as £60.00 dividends.

I have queried this matter with the company concerned, but they say they were correct in making the 10% 'dividend tax' deductions last tax year - yet they were the only company in my experience which did this. There has been no change in the similar dividend payments which I have received this tax year from other companies - which tends to confirm the case.

I asked the particular company concerned what happened to the 10% amounts deducted as 'dividend tax' and how these might possibly have been paid to HMRC, but they have refused to tell me..

I have been trying to fully understand this issue for a while now, and I have recently spoken to HMRC about it. Incredibly (in my opinion) the HMRC person with whom I spoke said that all UK dividend payments should have had the 10% 'dividend tax' deducted by the companies making dividend payments in previous tax years, and that no UK dividends should have been received 'gross' without such 'dividend tax' deductions. They were very concerned to hear that I had apparently received some dividends without having any 'dividend tax' deducted at source.. This response surprised me somewhat, so I told the HMRC person that I disagreed with what they were telling me. They actually said that in my case, the one company which had made the 10% 'dividend tax' deductions in the last tax year was right, and that all the other companies which hadn't make such 'dividend tax' deductions were wrong..

This is why I turned to this forum for help with this issue.. I now agree that it probably isn't a tax issue but more likely a company law/payment issue, but the advice I received from the HMRC person has caused added confusion..

As the company concerned says it has acted properly, is there any advice about how I might deal with this to perhaps obtain the deducted payments? This would be a very significant amount when applied to all shareholders. The company has stated that it will not discuss this matter with me.

Regards

RJS

[Lambs]

R,

It is not for us to say that the company has acted improperly, and owes its shareholders money. But it certainly smells wrong to me and, I suspect, to BD.

I don't know how much money is involved in your case, or for other shareholders as well. If this is in respect of simply ordinary shares, then you probably will NOT have lost out, since the profits NOT distributed as part of the full 6% simply belong to you anyway. If, however, yours is a 'special' class, such as preferential shareholders, (which is common where there is a fixed percentage payout), then the profits NOT paid out as dividends but retained may not ultimately 'belong' to you so you may arguably have lost out. In which case, it may be worth approaching fellow shareholders to see if they feel similarly - large shareholders down. It may simply not be worth the carrot, as they say. Or it may not really have cost you anything if those profits still ultimately belong to you. This is beyond my area of expertise, it has to be said. IF it really is costing you, then I think your next stop should be a lawyer versed in company law, or similar.

Regards,

Lambs

Oh, and nothing HMRC's advisers say surprises me any more.