The new dividend tax – a third way to tax planning?
Alan Boby, Partner at UK200Group member firm Ellacotts LLP, discusses the alternative forms of tax planning surrounding this year's upcoming changes to tax on dividends.
The new dividend tax is being introduced in April and this will cause many company owners and their tax advisers to reconsider their remuneration strategy. It has been the case for many years that the payment of salaries and dividends are compared to find the most tax-efficient way to pay out private company profits to director shareholders.
However, if those individuals have lent funds to the company they may be able to charge interest to the company and extract funds in that way. All of a sudden, interest may be the front runner because salaries generally carry a National Insurance cost and the dividends will be taxed more heavily from 6 April 2016! The interest rate charged to the company is not always easy to judge, but if the loan is unsecured a significant annual rate could be justified.
It may also be possible for director/shareholders to charge a rent if their company uses personal property for business purposes. However, caution is required because the rent charge would need to be commercially justified. Also, a rent charge could restrict Entrepreneur’s Relief for capital gains tax purposes if the property is sold at a later date.
Remember that companies need to deduct income tax from interest payments to individuals. The tax deduction rules extend to cover payments of interest and other ‘annual payments’ (such as royalties) made by companies to individuals. Tax should be deducted at the basic rate of income tax (currently 20 per cent) and is reported to and paid with a special form (form CT61).
The form CT61 initially has to be ordered from HM Revenue & Customs (HMRC) using a special telephone order number and it is then sent directly to the company. The form needs filing with a cheque payable to HMRC for the income tax by the 14th day after the end of the calendar quarter in which the interest/annual payment is made and also after the end of the accounting period if it does not coincide with the end of a calendar quarter.
The company should also provide the individual with a tax deduction certificate (form R185), which is available as a downloaded document on HMRC’s website at http://www.hmrc.gov.uk/forms/r185cert.pdf. The individual can then use the amounts on the form R185 to complete the relevant self assessment tax return and claim credit for the income tax has been paid (at the basic rate) at source.
As with all such tax situations, advice should also be sought before proceeding. For further details call Alan Boby on 01295 250401 or email firstname.lastname@example.org
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