When is a dividend taxable?
Imagine a scenario. Just before the end of the tax year, you drew some cash from the company’s bank account for personal use.
Now we’re in another tax year you intend to treat the payment as a dividend. When is a dividend taxable?
There might be trouble if the transaction is left in limbo in the company records if you have used the company’s bank account to make a personal purchase.
This might be because it’s not recorded. Or perhaps your bookkeeper, not knowing the nature of the transaction, added it to a suspense account with a view to putting it in the right place later.
Now, the chances of HMRC picking this up are small. But if it did it would have a strong argument for saying that the payment should have been subjected to PAYE tax and National Insurance. And therefore could penalise your company accordingly.
When Making Tax Digital for Business is fully up and running undesignated transactions might be easier for HMRC to spot.
So what do you do if you don’t want the payment to be considered as salary? You 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 be managed or mitigated.
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 your bookkeeper uses it to balance your DLA.
Alan is a director shareholder of ABC Ltd. On 1 March 2018 he drew the sum of £10,000 in cash from the company’s bank account to pay for a new kitchen in his home. ABC Ltd’s bookkeeper records the transaction as a charge to his DLA.
Alan owes ABC Ltd £10,000. On 5 July 2018 ABC Ltd declared an interim dividend, Alan receives no payment for this. Instead the bookkeeper credits Alan’s DLA with £10,000 on 12 July. This wiped out the debt.
In the above example the dividend does not replace the £10,000 as a debit to Alan’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 Alan’s DLA.
This means it’s not taxable for 2017/18 -when Alan drew the cash, but in 2018/19 when it was paid.
Got any questions about when is a dividend taxable? Give one of our friendly team a call today.