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Dividends - Genuine, Contemporaneous Fact


Julie Butler - Expert Author

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10 September 2012

Taxpayers are currently in a tax year that has a top income tax rate of 50%. This top rate of tax is not reduced to 45% until 6 April 2013. There will obviously be tax advantages in delaying dividends until the tax year 2013/14 for those in very high rates of tax as the 45% rate is simply more beneficial than the 50% rate. There will be other planning angles around the 45% rate.

There is no doubt that in this current tax environment there are huge incentives for planning around when dividends should be taken from small and medium sized limited companies where the proprietor owns and controls the business and also with family controlled companies. Tax planning around dividends can be at one level making sure that personal allowances are utilised and that basic rate bands are used for income tax year on year. With the introduction of the 50% tax rate, the 40% tax rate is deemed more attractive. The key planning point is to ensure that the income reaches to the top of the 40% band but doesn’t exceed it. If this were to happen there would be a loss of personal allowances and a very high marginal rate etc. It is fair to say that tax planning around withdrawing monies from small privately owned businesses has never been more complicated.

Not “post balance sheet paper reconciliation”

Many tax advisers look on the dividend tax planning as a post balance sheet paper reconciliation to shareholders tax returns for the best and most efficient way of extracting dividends in personal tax terms with interaction around the directors current account. It is important to remember that the dividend payments must be supported by contemporaneous evidence – they cannot be “paper transactions” to sort tax planning issues and this matter is made very clear in CTM 20095.

Many family companies receive financial support from the directors and there are often quite substantial loans to the company by directors that they can withdraw monies taken as opposed to needing to convert these to dividends. There is often planning around the directors’ current account and the interaction of monies drawn, dividends to be drawn and the directors’ personal tax returns and obviously the shareholders’ personal tax returns but CTM 20095 makes the importance of the dividends being genuine contemporaneous fact as opposed to paper transactions..

Practical Tax Planning Point

The practical planning point has to be to plan ahead not retrospectively “adjust”. The 5 April 2013 might seem a long way off but now is the time to plan. Now is a good time to project forward the tax efficient dividends to be taken to make sure there is compliance with CTM 20095. It is important that the contemporaneous entries in the accounting records do tie into board minutes and the dividend vouchers are produced as part of the ongoing management of the company as opposed to a retrospective tax planning exercise after the company year end and/or the director/shareholders personal tax returns are due.

About the Author

Supplied by Julie Butler F.C.A. Butler & Co, Bennett House, The Dean, Alresford, Hampshire, SO24 9BH.  Tel: 01962 735544.  Email;, Website;

Julie Butler F.C.A. is the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine Tax Planning ISBN: 0406966540, and Stanley: Taxation of Farmers and Landowners (LexisNexis).

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Article Published/Sorted/Amended on Scopulus 2012-10-24 09:10:07 in Tax Articles

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