Member Article

Waltons Clark Whitehill issues warning to companies

Waltons Clark Whitehill, the Tees Valley-based firm of accountants and business advisers, is urging companies to review current procedures when it comes to the payment of dividends. They also want to draw the attention of companies to changes to tax rules when offering short-term loans to shareholders/directors.

George Hardey, a tax expert at Waltons Clark Whitehill, is encouraging companies to review their procedures and implement a simple set of steps when it comes to paying dividends to try to prevent subsequent problems with Her Majesty’s Revenue and Customs (HMRC).

He said: “In light of HMRC’s enquiries into perceived tax evasion and avoidance in small and medium sized companies, it is vital to have proper procedures in place when a business owner is trying to arrange their affairs in a tax-efficient manner, sometimes involving modest salaries for directors and payments of dividends to shareholders.

“Although this kind of strategy is common and there are few formal requirements to report the payment of dividends, other than as income within tax returns, it is still necessary to ensure that company law requirements are met. Properly documenting dividend payments throughout the year is particularly important.”

George said: “It is important that the declaration of dividends is followed properly for any company, as HMRC is starting to clamp down on any irregularities. As a result, companies should be firstly checking if they have sufficient reserves and that this is recorded and made aware to all shareholders in a board meeting. In addition, it is vital to keep a separate record of dividends paid to each shareholder by providing them with a dividend voucher at that time of payment or when the relevant credit is posted to their loans account.

“Following these simple steps will help minimise any irregularities and I would strongly urge companies to ensure that an efficient procedure is in place to try and avoid any later problems.”

HMRC also feels there is abuse of the tax system when a close company makes a loan to a participator (generally shareholders/directors). The company is charged at 25% corporation tax on the amount of the loan outstanding at the end of the accounting period, however, the tax charge is reduced proportionally if any repayment is made within nine months. HMRC feels repayments and new loans are made to manipulate the possible tax consequences with the intention of reducing tax liabilities.

With the introduction of new rules in effect from the Budget, where basically the repayment will in many circumstances be ignored when calculating corporation tax liabilities, companies need to consider the impact these new rules will have on their cash flow because of what could be an unexpected increase in corporation tax.

George added: “In light of the Budget in March, it is important that close companies consider the impact the timing of repayments of loans will have on their cash flow, with the increase in corporation tax on loans to shareholders/directors. Again I would strongly urge companies to assess their current procedures and obtain professional advice before making changes accordingly.”

George also warned that HMRC could soon introduce further changes to this area of taxation. A consultation exercise is currently underway that would see the current temporary 25% corporation tax charge on the type of loans mentioned above increased to 40% or altered to a permanent 5% annual charge. George advised that companies should keep a wary eye on this area of the law and watch for possible announcements in the Government’s Autumn Statement later this year.

This was posted in Bdaily's Members' News section by Waltons .