Varying dividends across multiple share classes

[Jarna]

Scenario: 5 members in a private limited company, all with an equal shareholding and all contributing to the business, but only three of the 5 are directors. Directors have one class of share and non-directors have another, though both share classes have identical rights.
Question: Is it legitimate to pay a higher rate of dividend on the director class shares versus the others, or is there a risk of the difference being regarded by the Inland Revenue as being taxable remuneration (i.e. PAYE)?

[jamesconstantine]

It is perfectly legitimate to have diferent classes of shares for dividend purposes as long as it is commercially justifiable and not done for tax evasion. That would be the case for example where some shareholders spend more time working for the business than others.

Nevertheless, you should ensure that the different classes clearly specify their rights and there is a comply with legislation.

James Constantine, Chartered Certified Accountants
http://www.taxadviceuk.com
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[Jarna]

I guess if the difference was purely justified on the grounds that the directors were holding "more senior" roles in the business, that's no different in principle to varying dividends based on hours worked, i.e. it is just an alternative way of looking at "contribution" which should in theory be reflected in salary or bonuses rather than dividend.

Out of interest, what would be an example of a "commercially justifiable" reason?