Up and down the land I am sure that accountants are having lots of conversations with clients about accelerating the voting of dividends (if not they probably should be). Of course the reason for this is that from 6 April 2016 the Chancellor has decided to put an extra 7.5% of income tax on all dividends.
The last time that income tax rates increased (from 40% to 50%) accountants were faced with a similar situation – and HMRC expressed an interest in large dividends that were ‘so say’ voted before the change in rate. I saw at least two cases where HMRC enquired into large dividend payments to double check the true date of voting.
Of course we know the importance of avoiding backdating dividends – this is not good practice. Nevertheless, many accountants routinely wait until the preparation of accounts to look back and vote a suitable amount of dividends to clear a loan account for example. This is never ideal, but it certainly is undesirable when a change of dividend income tax rate is in point.
So what should accountants be saying to those clients who want to accelerate dividend payments?
- Make sure you have distributable reserves available to vote the size of dividends your client desires. Would you believe we have seen an accountant who voted dividends for three years even though no reserves were available and actually noted this in the accounts!
- Do the dividend paperwork contemporaneously, and record it electronically so that it is date stamped and can be shown to HMRC if necessary.
- Make the entry on the accounting software before 6 April 2016 – do not wait to do it at a later date.
There is no doubt that George Osborne knows that shareholders will accelerate dividends, and the tax liability thereon, and there is some advantage to the Exchequer in that – nevertheless, I expect HMRC will still test the paperwork supporting the larger dividends that are paid.