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Post Info TOPIC: Alphabet shares


Master Book-keeper

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Alphabet shares


100% Shareholder wants to pay 100% director (neither holding the opposite positions) an occasional sum in regard to office holder duties.  The director is not on payroll.

I've been asked to record a 1k dividend through payroll (yes, I am aware that's an oxymoron!)  

So (and I haven't mentioned this to him yet) is it possible to create a separate set of share, with no voting rights, and would it matter what was paid as dividends to the Director in relation to the owners dividends.

Or is it better just to stick it through payroll (already set up as there is one employee) 

 



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John 

 

 

 Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.



Forum Moderator & Expert

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Hi John,

From the perspective of the people concerned it depends what other income they have as which is better.

From the perspective of the company salary is an expense that reduces profits where dividends are of course out of taxed profits.

There are too many variables to give a definitive which is better response.

Ok, looking at the scenario, the person who owns the company is not the director but are they related? married? If so, restricting the voting rights of one class of shares may play into the hands of the taxman. See HMRC's change of stance following their loss in the Arctic Systems case... You knew this wouldn't be as simple as it looked didn't you.

The theoretical question in there. Yes it is possible to pay different dividends to different classes of shares. But, there are other elements that need too be considered before deciding on a path to take.

You may also need to adjust the companies articles to allow for the different share classes and define the dividend distribution percentages. Case law to look at for that is Birch v Cropper (1889). If you are adjusting the articles then ensure that you have a good lawyer on board to word the articles so that the owner of the company retains the right to rescind / buy back share distributions if that is the path that you take.

All the best,

Shaun.







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Shaun

Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.



Guru

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Hi John

Just to add to what Shaun has said, not sure if this is entirely relevant without knowing all the details but you may also need to consider the 'employment-related securities' rules and in particular 

ITEPA 2003 s.477

as HMRC may still look to tax it as employment income



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Doug

These are only my opinions of how I see things and therefore should not be taken as advice



Master Book-keeper

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Morning boys

Covered nicely of course.

Personally I am interested in why the director/Shareholder position is set up as it is? Not saying its wrong, but what influenced it, especially on the basis that it appears the director is getting no remuneration whatsoever - so what is their motivation for running the business?

The question that does need to be asked to my mind, is what is in plan for remunerating this Director moving forward. Was the £1000 a one off 'bonus' and the word 'dividend' was just used incorrectly?

Yes the married part is an issue and HMRC are not keen on 'income shifting' as you know. Artic Systems sprang to mind immediately. There are a few other cases that follow, as HMRC I think arent happy about this situation, which might be why they have tried with changes to ER, which I assume is one of the elements you are talking about Shaun? The plan was that no shares will be eligible for ER where there are different classes of shares, unless the Articles state all shares rank pari passu for distributions (and some other stuff), albeit after much consteration this was adjusted with the alternative test operating alongside the distributions test.

John - Ive dug out an old article from Jennifer Adams, which is still relevant in lots of ways, but must be tempered with the changes afoot, so Ive added a coupleof others. I would suggest you have that chat about intentions for paying the Director moving forward and then get buy in some time from a tax advisor and totally agree - get a good lawyer. In this, due to the changes, do not rely on formation agents. Ive included a legal link as well.

www.accountingweb.co.uk/business/finance-strategy/alphabet-shares-get-the-details-right

www.barrettandco.co.uk/2019/03/26/what-are-alphabet-shares-and-why-you-may-want-to-have-them-the-reynolds-report/

www.bdo.co.uk/en-gb/insights/tax/tax-support-for-professionals/entrepreneurs-relief-the-death-of-alphabet-shares

www.myerson.co.uk/news-insights-and-events/is-hmrc-backtracking-on-alphabet-shares

www.icaew.com/library/subject-gateways/tax/tax-cases-and-legislation/settlements











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Joanne  

Fallows Hall Ltd 

Winner - Bookkeeper of the Year 2015, 2016 and 2017

Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.

 



Master Book-keeper

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Hi Joanne

The Director receives dividends so does get paid in that way. He has other income as well so this is the most effective way for him, he hasn't a clue when it comes to running a business so doesn't want to be involved in Co House stuff.  As far as I know the two are not related although they are friends but I will check.  However, it appears more complicated than I first thought and it was just the wording of dividend that set me off on the train of thought about alphabet shares.  Articles are standard so it would mean messing about with them as well.

Thanks Shaun and Doug as well, invaluable information on a subject I've not really looked into, hence the question.



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John 

 

 

 Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.



Master Book-keeper

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Leger wrote:

Hi Joanne

The Director receives dividends so does get paid in that way. He has other income as well so this is the most effective way for him, he hasn't a clue when it comes to running a business so doesn't want to be involved in Co House stuff.  As far as I know the two are not related although they are friends but I will check.  However, it appears more complicated than I first thought and it was just the wording of dividend that set me off on the train of thought about alphabet shares.  Articles are standard so it would mean messing about with them as well.

Thanks Shaun and Doug as well, invaluable information on a subject I've not really looked into, hence the question.


 Hi John

I'm well confused!! I know, that's dreadful English!

I thought you said the director wasn't a shareholder and the shareholder wasn't a director.   So why would the director be receiving dividends? 

 

 



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Joanne  

Fallows Hall Ltd 

Winner - Bookkeeper of the Year 2015, 2016 and 2017

Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.

 



Master Book-keeper

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Cheshire wrote:
Leger wrote:

Hi Joanne

The Director receives dividends so does get paid in that way. 


 Hi John

I'm well confused!! I know, that's dreadful English!

I thought you said the director wasn't a shareholder and the shareholder wasn't a director.   So why would the director be receiving dividends? 


 Doh!!!  I meant the Shareholder gets dividends.



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John 

 

 

 Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.

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