Mervyn MacDonald, head of tax at accountancy group DTE explains: ‘Many shareholding directors in owner-managed companies receive dividends as a tax-efficient method of taking cash out of their business. The principal benefit of taking payment in this way is that dividends do not attract National Insurance contributions. Over the past few years we have noticed an increased level of interest in dividend payments on the part of the HMRC’
A more vigilant HMRC may intend to challenge dividend payments to ensure they have been properly voted in accordance with the Companies Act 1985.
‘This is the latest in a series of attacks on owner managed businesses’ warns MacDonald, amid fears that the dividends clampdown is part of a broader anti-avoidance offensive by HMRC.
‘If any of the necessary steps are neglected, such as the need to show appropriate profits, then a payment that shareholders may consider to be a dividend may not be seen as such in the eyes of HMRC – with adverse tax consequences. If this happens over a number of years, tax, interest and penalties will be considerable.’