A dividend waiver is the right to a waive a dividend payment and can be a useful tax planning tool under the right circumstances.
Interim and Final
Before we understand what these circumstances may be its important to distinguish between the two types of dividends, interim and final.
An interim dividend is one that is paid during the company’s financial year. For tax purposes an interim dividend is treated as paid on the date it is actually paid. A final dividend differs in that it is paid after the company’s financial year ends. For tax purposes it is treated as payable on the day it is declared.
A key point to note is that a dividend can’t be waived once it has become payable, i.e. when an interim dividend is actually paid and when a final dividend is declared.
Minutes
In line with the administrative burden of running companies, adequate minutes must be kept of the meeting where the dividend (interim or final) is paid or declared. The minutes should state the waiver was presented by the relevant shareholder and that this was approved before the dividend was paid/declared.
Commercial justification
There must always be a genuine commercial reason for the waiver and not just for purposes of income tax. Genuine commercial reasons can include instances where a family company may wish to distribute a portion of profits with family members whilst reinvesting the remaining profits to fund growth. In such a scenario, the parents may waive their dividend while paying dividends to their children.
Examples
Company ABC has 3 shareholders – A, B and C with shareholding of 40/20/20 respectively. B waives his right to interim dividends at £100 per share.
| Company ABC | A | B | C | |
| Dividends available | 10,000 | |||
| Dividends paid | (6,000) | 4,000 | (waived) | 2,000 |
| Remaining profit | 4,000 |
The above example, provided there was a commercial reason for the waiver should be acceptable to HMRC. The below example highlights where a dividend waiver could be likely to be looked at by HMRC. If the dividends were to be paid at £150 per share and B waived his right the results would be as follows;
| Company ABC | A | B | C | |
| Dividends available | 10,000 | |||
| Dividends paid | (9,000) | 6,000 | (waived) | 3,000 |
| Remaining profit | 1,000 |
This would likely raise eyebrows with HMRC as the results if B had not waived his right to a £150 per share dividend would be as follows;
| Company ABC | A | B | C | |
| Dividends available | 10,000 | |||
| Dividends paid | (15,000) | 6,000 | 6,000 | 3,000 |
| Remaining profit | (5,000) ILLEGAL |
This is where the settlements legislation would be likely to apply.
AJN Tip – use dividend waivers as an important tax planning tool where there is commercial justification for it and be mindful of consistently waiving.
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