Waive goodbye?  HMRC notches up another victory against a widespread tax planning measure, the use of dividend waivers in family companies

It is not unusual to find family companies that still rely on the use of regular dividend waivers.

A potential  problem with this has been neatly illustrated by a recent tax case ‘Donovan & Mclaran v HMRC’, which was comprehensively lost by the taxpayer/won by HMRC

In this case the taxpayers were shareholders of a company. The wives had become shareholders in 2001. Each of the tax payers held 40% of the shares and each wife had 10%.  The dividend payments should have been in proportion to each person’s shareholding but they were not, because the husbands had waived their right to certain payments.  For several years dividends had been paid to the wives (waived by the husbands) to use their basic rate bands, and deprive HMRC of considerable amounts of higher rate tax.

 The critical points were as follows:             

  • The company did not have sufficient reserves( i.e. built up profits ) to pay the same dividend rate to all shareholders (in other words had the husbands not waived their rights to dividends the company could not have paid such a large dividend to the wives) 
  • HMRC’s argument was strengthened by the repeated nature of the waivers over several years 
  • HMRC were able to successfully argue that income had been intentionally diverted (‘settled’) from a higher rate tax payer to a lower rate taxpayer.  
  • The taxpayer could not demonstrate a commercial justification for the waivers 
  • The exemption for inter spouse gifts provided by Arctic Systems did not apply, due primarily to the use of the waivers

That is not to say that there are not still occasions when waivers are justified, but it is now pretty clear that what once may have been seen as clever tax planning is now being seen in a different way.  Contact us, if you would like our help.