Dividends are generally taxable on the basis of when they are received. This is a basic but important point because the receipt date will dictate the rate of tax (in cases where rates change) and the payment date. A dividend which is received on 5 April 2021 will be taxable on 31 January 2022, whereas a dividend which is received on 6 April 2021 will be taxable on 31 January 2023. So far so simple, but there are other nuances that director shareholders should be aware of. For example there can be differences in the tax treatment of interim and final dividends.
Interim dividends are taxable when they are placed at the disposal of the shareholder and this can include them being paid or credited to a loan account.
If there is a desire to delay the tax-point of an interim dividend then it should neither be paid or accounted for until the desired tax point.
If funds are required then these can be advanced using a short-term director’s loan which can be credited by the dividend in the future.
Final dividends are generally due and payable when they are approved and for some directors this can provide an unexpected tax-point. This is not however the case if a payment date is specified in the minutes because then it would not be ‘due and payable’ until that date.
The directors of Tradeco declare a final dividend for the 31 December 2020 year-end on 15 March 2021 although they anticipate paying these after 5 April in order to defer the tax liability. This will not work unless they specify a payment date after 5 April in the minutes. The default tax-point would be 15 March 2021.
Forbes Dawson comment
HMRC are certainly alive to these kinds of issues and often ask to see dividend paperwork to check that they have been recorded in the correct tax year. Directors should familiarise themselves with these rules to ensure that they do not unwittingly bring more dividend income into a tax year than was intended. Of course if tax rates increase in the future then shareholders may well want to accelerate rather than delay the tax-point!
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