UC self-employment and DIVIDENDS - again

Replying to myself! A further update.

This is in the customer’s journal about the dividends:

“I have checked our guidance and a business that is set up as a private limited company can pay dividends when it is financially stable & has sufficient profits.

Dividends can only be paid out of Net profits on a yearly basis once your Accountant has calculated your business’s Net profit for the year after taking account of tax, NI,  business expenses etc.

Dividends for Universal Credit purposes are disregarded providing they are under £6000 a year. If they are over £6K and under £16K they would be treated as Capital. If Dividend payments exceeded £16K you would no longer qualify for Universal Credit.

Hope this explanation makes sense.

Kind Regards
John”

So, if I’m understanding correctly they’re treating dividends as capital - which tallies with previous replies about dividends. Saying this, I don’t understand the reference to ‘yearly’ as I thought dividends could be paid more frequently. There’s a reference to (internal) guidance - has anyone got hold of it?

In the previous posts about SE and dividends there’s been reference to the information in CPAG - can anyone direct me to it as I’ve not found it (by chapter and heading as I don’t think the online version has page numbers). Also, I can’t find reference to dividends in the ADM - if you know where it is please share.

This changes my suggested wording to the DWP - it seems it would be helpful to point out that dividends are treated as capital. As the dividends have been paid more than once a year it’s likely that this is going to be problematic and will need challenging - any suggestions? (Help!)

Companies ‘declare’ dividends out of a profit at the end of an accounting period - so that can ordinarily be done only once a year - but interim dividends can be made throughout the year on the basis of anticipated profits which are then brought into account at year end.

At least that is as far as my recollections on company law go…

I am a bit lost as to what this is in aid of. The dividends are plainly not to be taken into account as income as we have established. I am not sure what your correspondent thinks that the consequences would be if your clients were to make multiple dividend payments to themselves throughout the year.

Concerning the treatment of dividend as capital, what the DWP say in the journal note about the capital limit would be correct only if the claimant has more than £16,000 in their possession, or available to take, on any one snapshot date.

If the company has been drip-feeding interim dividends during the year, or advancing a loan to the claimant which is later redeemed by converting it to a dividend, it is unlikely that a lump sum of >£16,000 has ever been present in the claimant’s bank account or available to take as a dividend all at once.  Just because the total dividend for the year is more than £16,000, it doesn’t mean that the claimant has that much capital.

This is a similar principle to rent from tenants - the SHAC HB guide used to advise that the annual rent from tenanted property should be regarded as capital, but that is not correct if it’s being paid monthly and the claimant spends it as fast as it comes in.

Thanks - these comments are really helpful.

It appears that when the claimants were originally told that dividends are only ignored once a year that the Work Coach had mis-interpreted the sentence ‘Dividends can only be paid out of Net profits on a YEARLY basis once your Accountant has calculated your business’s Net profit’ as meaning that only one dividend a year would be ‘ignored’. As it is, I think - it all depends on capital levels at the end of each AP, whether made up of dividends or other savings/investments.

Hi - a further query - when I help the claimant list income and expenditure do the dividends sit outside of this or do I include them in expenditure?

I think:

SE income - SE expenses (including PAYE earnings) = SE earnings
Dividends = capital (totally separate from income/expenses/earnings)

Then each assessment period, the DWP will consider income (earned income and SE earnings) and capital (ie dividends and any other capital).

Is this right?

DWP have advised that they list the dividends within income and expenditure and I’m just a bit nervous about not including them and listing them separately.

You definitely should not include dividends within income and expenditure each month, whatever the work coach has advised your client.

Dividends are often capital in the first instance, however, they may sometimes take the form of income (albeit not counted as income for UC) if paid regularly and by reference to a period. If so, they will only count as capital for UC at a later stage.
DWP assume that the change from income to capital happens in the AP following the one in which the income is received (i.e., if the money is still held by the end of the following AP).
However, it could probably be argued that if the dividends are paid by reference to a period longer than a month, then it may only convert to capital later than that.

Re. some official guidance, I don’t think the ADM explicitly discusses disregarding dividends, but the spotlight attached here does (see in particular the bottom of page 2).

In CPAG (24/25 edition), have a look at Chapter 7, heading “Running your business as a sole trader, partner or limited company”.

In the DWP a claimant’s dividends are treated differently depending on circumstances. If you hold shares in a company as an investment then your dividend payments ( full and interim ) are capital.
This is not the case if the claimant is classed as gainfully self employed as a company director. In this case the profit that the claimant director needs to report to UC is the profit prior to the payment of the dividend. So the payment of the dividend does not make a difference to the amount that DWP uses to calculate the claimant director’s UC. In the same way that a director’s wage is deducted from the profit but of course is used in the UC payment calculation ( usually via RTI )
https://www.gov.uk/government/publications/universal-credit-and-self-employment-quick-guide/business-expenses-you-can-report-to-universal-credit-if-you-are-self-employed

UC regs for self employment, company directors are very different to HMRC.
77. — (1) Where a person stands in a position analogous to that of a sole owner or partner in relation to a company which is carrying on a trade or a property business, the person is to be treated, for the purposes of this Part, as the sole owner or partner.
https://www.litrg.org.uk/benefits/universal-credit/limited-companies-and-universal-credit#:~:text=Exceptions-,Overview,or%20partner%20of%20the%20company.

Thank you Charles and UB40 - very helpful, as always.