Dividends

How are dividends treated in HB? I would appreciate some reference to the HB Regs.

Clmt is a 50% shareholder in a LTD Company and received a 5k dividend.

If you take the view that dividends are a form of income derived from capital (and I think they are), they should be treated as follows:

- if the value of the shares is taken into account but is less than £16,000, the dividends are disregarded as income and count as a one-off payment of capital as and when received (which normally means they don’t have any effect on HB, or not for very long anyway)
- if the value of the shares is being disregarded under the “analogous to sole trader” principle (often referred to as the “ladder and bucket” rule - take away the owner/director and you are left with a ladder and a bucket), the normal treatment of income from capital is that it can be taken into account as income.  But, as in the 1995 Palfrey case, I don’t think the Regs achieve this and so the divis are still disregarded as income.

Palfrey was about rent from tenants and a disregarded “reversionary interest”.  The Regs were amended to reverse the decision but I think a similar loophole remains for divis (if you have two hours of your life that you don’t particularly want to get back, I can explain why I think that is the case, but not unless you ask specially ...).

What I normally suggest to local authorities is that divis should be treated as notional earnings instead.  For tax reasons there is usually an artificially low salary, which inflates the company’s profit and increases the amount available for dividends.  They wouldn’t get a non-shareholder to do the same work for that salary and the company can afford to pay a proper salary, so for HB purposes we act as if it does.  Regs reference is 42(9)

Thanks for the reply.

I think that dividends should always be taken as capital from date actually paid and there is some caselaw non hb to support this. However dividends can only be paid from actual profits after corporation tax etc. It is not lawful to do otherwise and accountants will not agree to such although the profits can be from previous years carried forward on the accounts. It is tax efficient to do so although the government reduced the value of doing so in this tax year. Few small companies declare such and it is unlikely that a company paying dividends is worth less than 16k. It may still be disregarded of course under the sole trader rules mentioned by peter but taking into account the tax free personal allowance plus company costs the company must be doing very well to pay out such a dividend bearing in mind what the accountant can add in to the accounts to reduce the post tax profits