What is a dividend waiver?
As a general rule, every shareholder is entitled to receive dividends in proportion to the number of shares they hold. A dividend waiver is performed when one or more shareholders waive their entitlement to their share of the dividend and the remaining shareholders receive their entitlement.
Why perform a dividend waiver?
Dividend waivers should only be used for genuine commercial reasons. The most common commercial reason for performing a dividend waiver is so that the money can be reinvested for a specific purpose to increase the profitability of the business e.g. in an asset that improves productivity.
How to perform a dividend waiver
- Check that the waiver is being performed for commercial reasons and that no consideration is being given for the waiver
- Dividends must be formally and irrevocably waived via a deed that should be witnessed and signed by both the witness and the shareholder waiving the dividend. The deed should then be lodged with the company
- We would recommend stating the commercial reason in the deed for the dividend waiver and retaining all additional supporting documentation e.g. board minutes
- The deed must be executed prior to the shareholder’s right to the dividend arising (i.e. before the dividend is declared or paid)
- It is recommended that dividend waivers are not performed regularly e.g. on an annual basis. HMRC will look more frequently at dividend waivers which are performed frequently
Tax issues with dividend waivers
HMRC are interested in dividend waivers where there is a loss of tax as a result. Where tax is lost HMRC may consider whether the waiver should be deemed to be a ‘settlement’. HMRC suggest that the following 5 key factors are considered when determining whether settlement legislation should apply:
- The level of retained profits, including the retained profits of subsidiary companies, is insufficient to allow the same rate of dividend to be paid on all issued share capital
- Although there are sufficient retained profits to pay the same rate of dividend per share for the year in question, there has been a succession of waivers over several years where the total dividends payable in the absence of the waivers exceed accumulated realised profits.
- There is any other evidence, which suggests that the same rate would not have been paid on all the issued shares in the absence of the waiver.
- The non-waiving shareholders are persons whom the waiving shareholder can reasonably be regarded as wishing to benefit by the waiver.
- The non-waiving shareholder would pay less tax on the dividend than the waiving shareholder.
These indicators are useful to HMRC as they suggest:
- Whether a waiver is resulting in undue benefit to other shareholders
- Whether the shareholder waiving the dividend is gaining anything in return either directly or indirectly
- That a company would not be able to pay the rate of dividends they are paying without the waiver, for example:
Lee owns 80 ordinary shares in A Ltd. Nicola owns 20 ordinary shares. The company makes a profit of £25,000 in 2017. Lee waives his right to receive any dividend. The company opts to pay dividends of £1,000 per share i.e. £20,000 to Nicola.
From HMRC’s perspective the dividend can only be paid out because Lee waived his share. If Lee’s dividend entitlement had not been waived there would not have been enough retained profits within the business to distribute a share at this level (i.e. there was not £100,000 in the business. HMRC therefore would argue the waiver arrangement enhanced the dividend paid to Nicola by £16,000. In this case the £16,000 will be attributable to Lee for tax purposes.
We therefore advise that prior to any dividend waiver a check should be performed to ensure that there would be adequate retained profits to issue dividends at the proposed £x per share level to all shareholders if the waiver was not taking place.
What is the impact of Settlements Legislation?
Where settlement rules apply, the shareholder waiving their rights to the dividend will be taxable on the income of the other shareholders – normally this will result in the dividend income being the same as if the waiver was not in place.