Terms & Conditions

[Anonymous]

Ooooooooooookay,

One for the contractors amoung us. I have a claim from a guy who worked through an agency for a period and was paid for this time though a composite, “umbrella” or managed service company. It is a situation that many of us are aware of, or indeed make use of.

Now for one reason or another he won’t be entitled to benefit for this period, but it set me thinking. How would I average his earnings for benefit purposes?

He is a shareholder in the composite company. The composite company is paid for the work that he does. The company then pays him ate the national minimum wage, deducting income tax and NI. The balance of what the company has received for his work is paid to him as a dividend on his share.

Strictly, the dividend is precisely that – a dividend. It is paid to the shareholder from the “profits” of the composite company and subject to corporation tax, not income tax or NI. I don’t think that there is any way of treating this as earned income, it has to be treated as capital as any other dividend would be.

It looks to me that I can only take the “earnings” into account as earned income; the “dividend” is income-derived-from-capital as per HB reg 46(4). The capital itself, the “share”, is virtually worthless but the income from it has to be treated as capital. It seems absurd but I can’t see a way around it. 😯

Any ideas?

Darren

[Anonymous]

The distinction is that a payment of capital is i) made without being tied to a period; ii) made without being tied to any past payment iii) not intended to form part of a series of payments.

You could argue that the ividend payments your customer receives are therefore income and not capital. What caselaw is there?

[Anonymous]

The dividend payments are income to start with – but as income generated by capital, the Regs say that they must be treated as capital for benefit purposes.

This is the counterweight to tariff income – to avoid double-counting you use tariff income and not actual dividends, interest etc.

But you do sometimes get cases where there is an imbalance between the value of the capital and the income it generates. This is one.

I think you have stumbled across a loophole here (is that physically possible?). Notional earnings is the only solution I can think of: there is no reason why the umbrella company could not afford to pay all the income as salary – by paying salary below the going rate for the job, it is exploiting its workers. The fact that they are also shareholders is immaterial at thst stage. Worth a try?

[Anonymous]

[quote:78f0bfe3be]the umbrella company…is exploiting its workers[/quote:78f0bfe3be]

On the contrary, it is helping them to legitimately minimise their tax liability.

[Kevin D]

Are these earlier threads of any help?

new.hbinfo.org.com/forum/viewtopic.php?t=583
new.hbinfo.org.com/forum/viewtopic.php?t=1843
new.hbinfo.org.com/forum/viewtopic.php?t=1978
new.hbinfo.org.com/forum/viewtopic.php?t=2326
new.hbinfo.org.com/forum/viewtopic.php?t=3008
new.hbinfo.org.com/forum/viewtopic.php?t=4296
new.hbinfo.org.com/forum/viewtopic.php?t=4319
new.hbinfo.org.com/forum/viewtopic.php?t=4622
new.hbinfo.org.com/forum/viewtopic.php?t=7802
new.hbinfo.org.com/forum/viewtopic.php?t=8122

[Anonymous]

Hi,

Came across one of these just over a week ago, (Yes I am an agency worker and know the ins-and-outs of the umbella company).

To cut a long story short, I assessed the claim on the actual minimum wage as the earned income puting in the tax and NI deductions. The dividend I counted as other income and input the net amount after the corporation tax and expenses had been taken off.

I am not 100% confident that this is the correct answer however it does indeed look like a loophole (Thinking may submit a claim form, mmm!!! NOT)

[Anonymous]

I like the idea of notional income. It is income that the claimant has chosen not to receive (as “earned income”). The problem lies in the “for the purpose of getting more benefit” bit……

I have been given another point by a collegue. If the “capital” itself (the share) has no value, can it be defined as capital for the purposes of HB reg 46(4)? And if it can’t, then the dividend can’t be treated as capital so take it into account as unearned income. It’s a thought.

Hmmm. This could run and run. So I want no spats between agency staff and permanent staff here! ‘Tis the season to be jolly……

[Mark]

You could try 42(9) instead of 42(1) and avoid the “for the purposes” bit. You’d have to deem the umbrella company a different person than the claimant – but I think this flies.

[Kevin D]

I think Mark may have hit on something!

A limited company is definitely a different “person” to the individual – as Peter De La Mothe found in [b:3053369219]R(H) 05/05[/b:3053369219]. Although, I’m not convinced he’ll thank me for reminding him of that one…..

new.hbinfo.org.com/comdecs/ch_3013_2003.doc

[Anonymous]

Divdends are normally treated as unearned income. This is most certainly the case with tax credits as Reg 10(1)(d) of the Tax Credits (Definition and Caculation of Income) Regulations includes “dividends and other distributions of a companny resident un the United Kingdom and any tax credit associated with that paymeent”

“Distributions ” are defined in S209-211 of the Income and Corporation Taxes Act 1988:

S209 (2) states
“(2) In the Corporation Tax Acts “distribution” , in relation to any company, means—
(a) any dividend paid by the company, including a capital dividend;”

I dont think this person is being paid a capital dividend as the company probably does not have any capital that could be released as a dividend.

Neither “capital” nor “income”is defined in HB or social security legislation, although there are a number of decisions cited by Findlay on this issue, but the only thing that is any where near certain is that a payment is either capital or income, there is nothing in between.

As the dividends are paid regularly, in my opinion, they have a characteristic that suggests income.

[Anonymous]

There is an important distinction here, and Darren mentions it in his original post.

There is a lot of argument above in support of the view that a dividend is not a payment of capital, it is a payment of income. That is correct.

But the issue arises because, although it is a payment [b:a5bd795e0f]of[/b:a5bd795e0f] income, it is generated [b:a5bd795e0f]by[/b:a5bd795e0f] the claimant’s capital stake in the umbrella company.

In exactly the same way, building society interest is a payment [b:a5bd795e0f]of[/b:a5bd795e0f] income but generated [b:a5bd795e0f]by[/b:a5bd795e0f] capital.

In tax credits, there is no tariff income and these payments therefore are counted as income – because that’s what they are.

In HB/CTB there is tariff income and these payments are therefore [b:a5bd795e0f]treated as[/b:a5bd795e0f] capital for HB/CTB purposes – a deeming fiction to prevent double-counting. This puts the dividend outside the income assessment for HB/CTB. Would there be tariff income from the value of the shareholding? Heaven knows – not an easy one to value and I suspect it would come out at less than £6000 because the value is entirely dependant on the willingness of the contractor to carry on working for the company as a non-shareholder – which s/he wouldn’t do if there was only the minimum wage and no dividend in it.

I think Reg 42(9) is the only option you have here.

[Stalbansbenefits]

We asked the Adelphi about directors of limited companies and dividends a while ago…

[quote:bdc90a7f23]1 How to treat dividends?
You are correct when you say that reg 40(4) applies i.e. income from capital treated as capital.
You say that it has been suggested that dividends should be treated as income as the IR now treat these as income for tax purposes. The rules relating to the calculation of HB/CTB are different to the rules for calculating income tax for obvious reasons – social security benefits are payments out and tax is collection of revenue. There have been no changes to the HB/CTB rules so the current situation stands – income from capital treated as capital.

2 Irregular drawings
If the person is the director of a company he is an employed earner not self employed. I can appreciate that it may sometimes be difficult to decide what income to take into account if the person says that they only take occasional drawings. You could consider notional earnings under reg 35 (5) of the HB Regs, if you were satisfied that the employer i.e. the company, could afford to pay a regular salary.

3 Sizeable profits but low drawings
You could consider notional earnings as in 2.

I fully sympathise with your comments when you say that staff are not qualified accountants etc. but hope this helps.

Elsian Linsell
HSD
Adelphi

[/quote:bdc90a7f23]

[Anonymous]

Thanx guys, 42(9) works for me! The company and the contractor are separate legal entities and the contractor is being “paid”, as earned income, less than the amount he should……

Yep, I’d go with that.

Cheers,

Darren

[Anonymous]

I will admit I was wrong about the dividends of the agency worker as Reg 46(4) specifically requires that any income derived from capital except capital disregarded under certain paragraphs of Sch 6 must be treated as capital (although its not for tax credits and tax credits have replaced certain social security benefits so maybe the Adelphi need to catch up )

Its an example of different pieces legislation not keeping pace with each other

[Anonymous]

[quote:144ed604ca]The company and the contractor are separate legal entities and the contractor is being “paid”, as earned income, less than the amount he should……[/quote:144ed604ca]

Hmm, I’m not so sure that would hold up on appeal, at least not in all such cases.

Take my own situation, for example. I am managing director of my company – we are, true enough, two separate legal entities. I obtain work with a local authority via an agency, and the LA pays the agency for my services. The agency takes its cut, then pays my company. I am paid £x00 a month by the company. In some months I take a dividend, in some I don’t, and the amount of the dividend varies. (This is a different situation to contractors operating through an umbrella company, where the dividend is paid monthly with the salary.)

Now, as MD of my company, it is up to me to decide how much I (and any other employee of my company) should be paid as a salary and how much the company can afford to pay me as a dividend. Since there is no guarantee that I will step straight into another contract at the end of the current one, I must ensure that the company retains sufficient capital to pay my salary (and tax, NI and any business expenses I incur) during the periods when there is no income coming in to the company. So it is prudent for me to draw a relatively low salary and to only receive dividends when I am sure the company is sufficiently flush to do so.

So my question is: who the heck are you to decide what my company should be paying me as a salary?

[Author]

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