When is a dividend taxable?

Just before the end of the tax year you drew some cash from your company’s bank account for personal use. Now we’re in another tax year you intend to treat the payment as a dividend. When will you have to pay tax on it?

Using the company’s cash

We’re often asked about the tax treatment of cash drawn for personal use by director shareholders from their companies. If HMRC had its own way it would treat every such drawing as salary and demand that you and your company account for PAYE tax and NI.

Fortunately, HMRC isn’t in charge of deciding what goes in the rule book, it only enforces it. Despite HMRC’s dislike of this practice, there’s nothing wrong with it. However, you could end up on the wrong side of the argument if you don’t take steps at, or soon after, the time you draw the cash.

Not recorded

If you use the company’s bank account to make a personal purchase, there might be trouble if the transaction is left in limbo in the company records. This might be either because it’s not recorded or your bookkeeper, not knowing the nature of the transaction, adds it to a suspense account with a view to putting it in the right pigeon hole later.

Trap 1: While the chances of HMRC picking this up are small, if it does it will have a strong argument for saying that the payment should have been subjected to PAYE tax and NI and will penalise your company accordingly.

Trap 2: When Making Tax Digital for Business is fully up and running undesignated transactions might be easier for HMRC to spot.

Tip: If you don’t want the payment to be considered as salary, you should ask your bookkeeper to post it as a debit to your director’s loan account (DLA) as soon after the transaction as possible. This can have tax consequences, but they are far less severe than being hit for PAYE tax and NI and can be managed or mitigated.

No looking back

The one thing you can’t do with a transaction is change your mind. If you use the company’s cash for a personal transaction you can’t later say it was a dividend. What you can do later is to declare an equivalent dividend, but instead of taking it in cash have your bookkeeper use it to balance your DLA.

Example: Mary is a director shareholder of GForce Ltd. On 1st March 2018 she drew the sum of £10,000 in cash from the company’s bank account to pay for a new kitchen in her home. The GForce bookkeeper records the transaction as a charge to her DLA. Mary owes GForce £10,000. On 5 July 2018 GForce declared an interim dividend, Mary receives no payment for this. Instead the bookkeeper credits Mary ’s DLA with £10,000 on 12th July 2018. This wiped out the debt.

Dividend timing

In our example the dividend does not replace the £10,000 as a debit to Mary ’s DLA. It is a separate transaction which, as an interim dividend, is taxable when it’s paid for tax purposes that’s the date it was credited to Mary ’s DLA. This means it’s not taxable for 2017/18 – when Mary drew the cash but in 2018/19 when it was paid.

 

To summarize, you can’t look back and change the nature of a transaction. Therefore, to prevent trouble with HMRC record a cash payment as a debit to your director’s loan account (DLA). You can later declare a dividend to repay the debit. An interim dividend counts as taxable on the date it’s paid to you or credited to your DLA.

For more information, we provide a Business Consultation to ensure our clients benefits from tax planning and accounting matters.

Companies999 are Chartered Certified Accountants and Birmingham’s Best Company Formation Agent.

For any assistance contact Companies999, we will be happy to help you!

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