New Dividend Tax
We have picked out the relevant pieces of information from the HMRC about the new dividend tax for you.
Will the new rate affect my company?
This will affect companies who are liable to the starting rate of corporation tax (CT) or those receiving marginal relief from the small companies rate if they make distributions of profits other than to companies.
Will this affect any other liability of the company or its directors
(such as PAYE and NIC)?
Does this replace the IR35 legislation?
A. No. They introduced measures to tackle service companies in 2000 to ensure that employees could not avoid tax and NI contributions by using a company as an intermediary between them and their employer.
If this doesn‘t replace the IR35 legislation is there a double charge?
A. No, there is neither a double charge on the individual nor on the company. Where the company has engagements that are within the intermediaries legislation and is treated as having made a ‘deemed payment’ under that legislation, that deemed payment and the employers NIC thereon is deductible against the company‘s profits for CT purposes.
Existing legislation prevents the individual from suffering a double charge. So, where a company is treated as making a deemed payment and it makes a distribution in the same tax year or in a subsequent year, it can claim relief in order to avoid a double charge to tax on the individual. Relief, therefore, given by setting the amount of the deemed payment against the relevant distribution so as to reduce the distribution that is taxable on the individual.
How do I work out whether or not I have got to apply the new rate?
A. If your company pays corporation tax at an underlying rate of less than 19% and you make a distribution e.g. pay a dividend to someone other than a company then this new rate is likely to apply.
Assume that profits chargeable to corporation tax (PCTCT) for an accounting period are £8,000. You can distribute these profits by way of a dividend to individuals. The tax computation would be:
PCTCT £8,000 @ 0% = £0.00
Corporation Tax due = £0.00
the underlying rate:
(tax/PCTCT x 100) 0.00/8,000 x 100 = 0%
Non corporate distribution £8,000 @ 19% = £1,520.00
Remaining PCTCT = NIL
Total CT due = £1,520.00
Assume that PCTCT are £40,000. The distributions made in the accounting period totalled £35,000 of which £10,000 were made to a company. The tax computation would be:
PCTCT £40,000 @ 19% = £7,600.00
Less : Marginal Relief
(£50,000 – 40,000 x 19/400) = £475.00
Corporation Tax due on basic profits = £7,125.00
the underlying rate is 7,125.00/40,000 x 100 = 17.8125%
Non corporate distribution £25,000 @ 19% = £4,750.00
Remaining PCTCT £15,000 @ 17.8125% = £2,671.87
Total CT due = £7,421.87
What is meant by ‘underlying rate‘?
A. You can calculate underlying rate as follows:
(CT x 100) / PCTCT
(See examples at question 7 above)
What help is available to work it out?
A. If you need further help or advice you should contact your local HMRC office. There will also be full guidance on the calculation in the Company Tax Return Guide. And for those companies delivering their returns on-line it will do the calculation automatically.
If I get the tax due wrong will they charge the company interest or penalties?
A. The normal interest and penalty provisions will apply.
Where do we make a return of the extra tax?
A. On your Corporation Tax Self Assessment return.
When do you pay the tax?
A. On the normal due date for the payment of corporation tax for small companies, nine months and one day after the end of the accounting period.
When does the new rate start – which distributions?
– what profits?
A. The new rate when you make distributions to non company shareholders is on or after 1 April 2004. Where an accounting period begins before 1 April 2004 and ends on or after that date they apportions the profits.
Company has AP for the year to 30 June 2004
PCTCT for AP £40,000
: £15,000 on 1 November 2003 (Note 1)
£20,000 on 1 May 2004 of which
20% (£4,000) to a company (Note 2)
80% (16000) to individuals (Note 3)
£40,000 x 9/12 = £30,000 pre 1/4/2004
£40,000 x 3/12 = £10,000 post 1/4/2004 (Note 4)
Distributions (£20 000) exceed basic PCTCT of the relevant part of the AP (£10,000)
Proportion of PCTCT which can be matched is £10,000 x 80% (NCDs as a percentage of total relevant distributions) = £8,000
Underlying rate of CT for the AP is 17.8125% (see working 1)
£40,000 @ 19% = 7,600
Less Marginal relief 50,000-40,000 x 19/400 = 475
CT on profits = 7,125
Underlying Rate: Tax = (7,125 X 1,000)/profit 40,000 = 17.8125%
The total tax for the AP is therefore:
non-corporate distributions (NDR) applies to £8,000 @ 19%
remaining PCTCT at underlying rate £32,000 @ 17.8125 % = 5,700
Total CT Due = 7,220
Excess NCDs to be carried forward to next AP is £16,000 – £8,000 (matched this AP) = £8,000
1. does not come into the calculation of the NDR as before 1 April 2004
2. NDR rate will not apply to that part
3. new rate will apply
4. Only post 1/4/2004 profits fall to be considered for NDR
What happens if the distributions in an accounting period are more than the profits?
A. Where distributions exceed PCTCT for the accounting period, the excess is taken forward to the next or subsequent accounting periods to be ‘franked’ against future PCTCT.
Is there any carry back of excess distributions or losses?
A. The excess will not be carried back and the normal rules apply to losses.
What happens if the company makes a profit but no distribution?
A. The normal rates of CT apply.
So, that’s how the new dividend tax will affect you.