Terms & Conditions

[liffe]

This is a query from someone who has dealt with few self employed cases!.
I have a claim from a Director of a Company, and I do understand we have to treat them as employed earners under the normal rules. However, I am not sure how to treat the dividends they receive from their shares in the company. Are these treated as income or capital. If they are capital – how do we value them?

[Anonymous]

Off the top of my head and with no preparation, I would take the shares themselves into account as capital. If it’s a private limited company (as opposed to a plc) it may prove difficult to get a value for the shares though.

Quite prepared to be proven wrong……

Darren

[markp]

Agree with Darren

Income from capital (ie these dividends) would be treated as capital.

Do I know what I'm doing? The jury's out on that........................

[petedavies]

I’m not so sure it is that straightforward.

The first question to ask is who owns the company? – how many shares have been issued and who owns them? (If your claimant and, arguably, partner own 50% or less then no problem.)

If they own more than 50% they effectively full control. You then need to look at what your claimant does for the company – the role of a director is, to a certain extent, statutory. Anything beyond that is work.

Finally you need to look at the company accounts. Are the emoluments as a director and any payment for work done reasonable? Do dividends account for a disproportionate amount of the firm’s profit. Are there unreasonable capital reserves and undistributed profits?

I have seen more than one case where benefit as paid to owners of companies with, literally, a multi £m turnover where the true income had been hidden using just these sorts of devices.

[markp]

Pete,

I’m not saying it’s straightfoward and it’s a nice dodge for a self – employed bod to hide behind director status. I [b:30bf1d4fa3]would[/b:30bf1d4fa3] ask a lot more questions from the accounts before paying and might even consider referring th issue of dodgy accounting etc to Revenues and Customs. The dividends will, however, still be capital and I have presumed that the post refers to the fact that the shares issue is quite clear and are only the claimant’s.

Perhaps I should have made myself clearer.

Mark

Do I know what I'm doing? The jury's out on that........................

[petedavies]

Whoops, did not mean to cause offence & ’tis probably me who should have made myself clearer – I’m going down the lines of R41 & R42.

Dividends, undistributed profits and excessive capital reserves are but three ways in which a company can hide it’s true profits.

If the claimant has 51% of the shares then there is no doubt suitable remuneration would be available on his application, even if this meant a reduction in the dividend.

If a claimant has 100% of the shares then there is no need to declare a dividend (other than for tax avoidance purposes) – all of the profits would be available for the claimant to take as income via the role as director.

Whilst the argment may not appear particularly sensible, the only requirement is that the income be available on application. If the claimant is both the director and majority/sole shareholder I acn see no real way to rebut this presumption under ordinary circumstances.

If a claimant has 100% of the shares and does all (or possibly a lot of) the work then there is an additional argument that they are earnings and should be treated income under 41(3) anyway.

[Author]

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