In the majority of cases dividends are the most tax efficient way to extract profit from a company. Following proper procedure is becoming increasingly important if you are to benefit from the tax advantages that dividends offer.
The Companies Act 2006 recognises two types of dividend, interim and final dividends. Interim dividends require the directors to declare dividends via a board resolution and for the directors to decide to pay these.
Final dividends require the shareholder(s) to approve payment following a recommendation by the board of directors. It is essential that dividend payments, regardless of type, do not exceed the amount of accumulated after-tax profits.
As both interim and final dividends are taxed at the same rate HMRC isn’t concerned with the type of dividend, rather that the relevant procedures have been followed. Dividend payments are expected to come under increasing scrutiny as a consequence of new anti-avoidance rules regarding loans to directors and shareholders. If HMRC finds that dividend procedures haven’t been followed they will treat payments as a salary, bonus or loan which may be subject to a higher rate of tax.
One option to ensure that your dividends are recognised by HMRC without having to spend a considerable amount of time completing paperwork is to outsource the company secretarial functions of your business to a specialist provider such as London Registrars. Outsourcing this vital function to us allows you to benefit from the knowledge and experience of our highly qualified team of company secretaries at a fraction of the cost of employing an in-house company secretary.