Dividends are used by many business owners as a tax-efficient way to extract profit from a company. So it is important to understand the procedure for paying them. But does it matter whether the dividend is final or interim if the tax treatment is the same?
The Companies Act 2006
It isn’t HMRC that makes the distinction between the two dividend types, but company law. The Companies Act 2006 says “The company may by ordinary resolution declare dividends, and the directors may decide to pay interim dividends”
So one group of people, the directors, may pay interim dividends, but shareholder approval must be obtained before a final dividend is paid.
So why is HMRC interested?
HMRC doesn’t particularly care which type of dividend is paid. It is interested in whether the payment is really a dividend or whether it was salary a bonus or a loan payment. As higher taxes and NI may accrue with these payments HMRC will want to see proof that the payment was a genuine dividend.
And this is where the timing of the payment and the paperwork are important. Under new anti-avoidance rules it is no longer possible for a director to receive a loan from the company, repay it to avoid the 25% tax charge and then take out a fresh loan within 30 days. HMRC will want to be certain that the payment is indeed a dividend. If the correct procedure has been followed and the paperwork is complete then this should not be challenged.