Dividend myth, Interest received by estates, Share loss relief

The changes in the taxation of dividends and interest from 6 April 2016 have shaken up practice in those areas, and given birth to a few myths. We debunk one of the dividend myths, and outline a new HMRC extra-statutory concession which may ease administration for deceased's estates. We also look at share loss relief claims which are regularly challenged by HMRC.

This is an extract from our topical tax tips newsletter dated 5 May 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Dividend myth 
We came across a dangerous idea on Linkedin last week concerning the backdating of dividends to avoid the dividend tax that applies from 6 April 2016. The writer suggested that if a dividend is paid within nine months of 5 April 2016 it could be treated as a dividend for 2015/16. This is of-course total nonsense. [Since publishing our newsletter the article on Linkedin has been revised]

To be clear: a dividend can't be backdated. Under company law the dividend must be approved by the directors and paid out at some point after that vote. There is no time limit on the period in which the dividend must be paid out after approval. In deed the dividend need not be paid in cash, it can be credited to the shareholder/ director's account within the company. 

However, the dividend is taxed at the date it is paid to the shareholder or credited to the shareholder's account within the company, not by reference to the date it is declared and voted on. 

If a dividend was approved before 6 April 2016, and paid out after that date it would be taxed in 2016/17 not in 2015/16 and it would be subject to the dividend tax. The only way that a cash dividend received in 2016/17 escapes the dividend tax is if it was credited to the shareholder/ director's account within the company before 6 April 2016, and the individual then drew from that account an amount equivalent to the dividend. 

The company must have distributable reserves at the time it approves the dividend. The ICAEW provides a useful factsheet on distributable reserves, which has been updated for the FRS 102 financial reporting regime. The directors must obey company law and ensure they are not paying a dividend out of capital. The decision to approve a dividend should be based on relevant accounts, not simply on cash balances in the company's bank account. 

If the company does not have distributable reserves any dividend declared will be illegal, and any shareholder who receives such a dividend will be obliged to repay it to the company. This was explored in the insolvency case: It's a Wrap(UK) Ltd v Gula & another. HMRC tend to treat illegal dividends as earnings under ITEPA 2003, s 62, or alternatively as a director's loan, if the amount is repaid to the company eventually. 
 
This is an extract from our topical tax tips newsletter dated 5 May 2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The full newsletter contained links to related source material for this story and the other two topical, timely and commercial tax tips. We've been publishing this newsletter weekly since 2007; it's clearly written and focused on precisely what accountants in general practice need to know about each week. You can obtain future issues by registering here>>>