A shareholder has the right to receive dividends. When the company has retained profit available, they may declare a dividend. A dividend is a share of profit paid out of the company which is proportionate to the number of shares held.
If a shareholder decides to waive their right to a dividend, e.g. due to commercial purposes, a deed of waiver form should be completed. If a waiver is incorrectly used, such as for tax avoidance purposes, you attract being challenged by HMRC by forgoing dividends, writes Emma Jones of Begbies Traynor Group.
A shareholder may decide to waive dividends if they are no longer active in their role but would like to keep their shares in the business. If the shareholder feels that the profit would be better left in the business for tax purposes, they may waive their dividends.
What is a dividend waiver form?
This is a form that declares your wish to waive your right to receive dividends for a single instance or a specified period of time. You should consider this carefully as if a waiver is used for a prolonged period or on several occasions, HMRC may challenge your decision as a result of the reduced tax they are due to receive. By forgoing your right to a dividend, you are receiving less income and therefore paying less tax to HMRC.
To ensure that the waiver is correctly enforced, it should be dated, signed and witnessed by the company and put in place before the right to receive a dividend arises.
If a dividend waiver is enforced, you would typically pay shareholders the same number of dividends as usual. When calculating this with the amount of dividends waived, the business should hold sufficient funds to pay all shareholders. If the amount paid to shareholders is increased and is more than the funds held by the business, including the waived dividends, you could be challenged by HMRC.
Waive a dividend example:
Harry has 50 shares in the business, Billy has 25 shares and Karen has 25 shares. If a dividend of £100 per share was declared, the following is paid to shareholders:
Harry – £5,000
Billy – £2,500
Karen – £2,500
If Harry decides to waive his dividends through a correctly enforced waiver, he will receive nothing and Billy and Karen would receive their dividends as usual.
Why would HMRC challenge your dividends waiver?
If HMRC suspects that you are shifting your income to other shareholders because the business would not be able to afford payment to all shareholders unless some waived their rights, this gives HMRC reason to challenge. This will be recognised as ‘settlement of income’ as income rights are passed on to other shareholders and recognised as a measure to avoid tax. Recent cases involving income shifting through dividends waivers amongst spouses include Buck v HMRC (2008) and Donovan and McLaren v HMRC .
This is due to settlement legislation which states that where the income of the settlor, (i.e. shareholder with waived dividends) is diverted to another shareholder due to tax purposes; this shall receive the same tax treatment as if paid directly to the settlor.
In some cases, income has been diverted to another spouse who is a shareholder on a lower tax rate. HMRC actively tackle behaviour as such which intentionally dodges the payment of correct taxes. A common solution is by creating a classification of shares which allows you to differentiate between which group receives dividends at a given time, such as, Class A shares, Class B shares and so on.
A dividend waiver is a formal deed which must be used solely for commercial purposes and comply with settlement legislation. Before deciding to waive your right to dividends, seek advice from your accountant to ensure that the waiver is used correctly and in line with HMRC guidelines.