| December 2006
Introduction
The amount and timing of tax payments by individuals under the self-assessment
regime is determined by the amount of income (and gains) in each tax year.
Tax planning in this area typically includes deferring income or gains
until just after the end of the tax year (5 April), where it might otherwise
be treated for tax purposes as having been received on or before that
date. The potential benefit of delaying payment is to defer the payment
of tax.
To take a straightforward example, the tax on a 'one-off'
income receipt (e.g. a capital gain) on 5 April 2006 would become due
on 31 January 2007. By delaying the receipt by just one day (i.e. until
6 April 2006), tax is deferred by almost a year, i.e. until 31 January
2008.
This planning technique is the subject of this month's Tax Clinic question:
Q:
We are attending a meeting with our accountants this week and I wanted
to try to clear something up. I am a retired Director of a company in
London whose MD is now running a new idea past me that does not really
make sense. He explained that by not declaring a dividend until April
2007 tax does not need to be paid until 2009. He has suggested extending
a Director's loan to cover the amount and put off declaring any
dividend until that time.
What are the overall advantages of this? - I understand that it
is nice not to have to pay tax for a while however it seems just to be
putting it off and then getting hit by a massive tax bill in 2009!!
Any help would be greatly appreciated as I am not the most 'savvy'
person when it comes to figures.
A:
Editor's Comments
It is not clear why the company needs to make a loan to the director.
It might be that a dividend is paid at the same time each year, and a
loan is required to compensate for the delayed dividend payment. The company
law issues involving dividend payments to director shareholders is outside
the scope of this Tax Clinic, but may need to be considered.
In the case of a 'close' (ie. broadly a closely-controlled)
company, loans to shareholders can result in the requirement for a company
to make a tax payment to HMRC, equal to 25% of the outstanding loan balance
9 months after the end of the company's accounting period. This
tax is repayable to the company when the shareholder repays the loan.
In 'The Electrician's' case, it is not clear what the
time period will be between the loan and the dividend. However, provided
that the loan is repaid within 9 months of the company's year end,
then (assuming that the company is 'close') this tax liability
should not materialise.
Interest-free loans to directors can have income tax implications as
well. The 'benefit' of an interest-free loan of over £5,000
may be taxable on directors, subject to certain limited exceptions.
Finally, additional tax on dividends is only payable by individuals who
are liable to higher rate tax in respect of the dividend. So for individuals
who are not liable to higher rate tax for the tax year in question, the
timing of dividend payments would not matter in any event.
Responses from contributors included:
King Maker
Do you know the Year End of the company?
Newbie
Unfortunately not any more - taken a back seat for quite a few years
now!! Is this very important as I can find this out?
Kingmaker
It should be available from Companies House website.
Not vitally important, but easier to see the interaction of the dividend
date and Section 419 interest on overdrawn directors' account + Benefit
in Kind implications.
jpcentral
Possibly what he means is that, if you are a higher rate taxpayer, by
paying a dividend in April 2007, this would have to declared on your 2007/08
tax return and the excess tax paid in January 2009.
If the dividend was paid in March 2007, this would have to be declared
on your 2006/07 return and paid in January 2008.
The advantage to you is that you would have use of the tax money for
one year and be able to earn interest.
If you are not a higher rate taxpayer, it won't make any difference.
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