With ‘alphabet shares’ different shareholders hold different classes of share – Class A, Class B, Class C and so on. This gives flexibility, as shareholders can then be given different levels of dividend. On the other hand, it can also give rise to HMRC challenge, for example in cases where shares have no rights, other than income. HMRC may also seek to challenge on the grounds that alphabet shares are caught by the settlements legislation, and it is an area where practitioners need to tread with caution.
Declaration and Payment: Paperwork
Interim dividends must be declared at a board meeting and the decision minuted. It is vital that clients are reminded of the importance of following the correct procedure. Minuting should be contemporaneous, not retrospective. Tribunal cases suggest all too many instances of lax compliance, and clients need to be aware that calling something a dividend does not make it a dividend.
Having noted the date and place of the board meeting, the names of directors/company secretary present/absent, minutes should record that:
- The directors understand that the company is continuing to trade profitably.
- That there is no reason to assume that this will not continue for the foreseeable future.
- That this is evidenced by management accounts ‘prepared up to … showing distributable reserves of … : or by the balance of the company bank account being … at x date’.
They should then specify that ‘it is resolved to make payment of an interim dividend of … per ordinary share in respect of the year ending … to be paid on x date to those shareholders registered at the close of business on that date’. The minutes should then be signed.
When is a Dividend Paid?
Section 1168(1) of CTA 2010 states that:
‘For the purposes of Corporation Tax Acts dividends are to be treated as paid on the date when they become due and payable.’
Thus, it is possible for a dividend to become due and payable at a date earlier that that on which payment is actually made.
HMRC’s Company Taxation Manual at CTM15205 states that CTA 2010 s. 1000(1)A and s. 1168(1) are interpreted as working together to deem a dividend paid on the date it becomes due and payable:
‘A dividend is not paid, and there is no distribution, unless and until the shareholder receives money or the distribution is otherwise unreservedly placed at the shareholder’s disposal, for instance by being credited to a loan account on which the shareholder has power to draw.’
Final Planning Point: Final Dividends
Final dividends should be declared at the company’s AGM. When the payment date is declared, HMRC will consider that they become shareholder income, providing a final planning possibility. Clients could – even at this stage – declare a final dividend in 2017/18, with payment delayed into the next tax year.