In certain scenarios, one or more shareholders may decide to forego their rights to receive a dividend payment. In this case, relevant shareholders must make a formal ‘deed of waiver’ election prior to the dividend being declared - to waive their right to dividends.
For compliance purposes, minutes from a Board meeting should record the discussion when the dividend waiver was agreed upon. They should also be signed and witnessed as an official record held by the company.
Subsequently, a dividend waiver deed form should be filled by the respective shareholders. It can apply for the next dividend payments, for a specified period (like for the next financial year of the company), or indefinitely – although not recommended.
If a waiver is incorrectly used, such as for tax avoidance purposes, you might increase your chances of being challenged by HMRC. To reduce the risk of HMRC scrutiny when effecting a dividend waiver, a formal ‘deed of waiver’ must follow these procedures:
- Being a formal deed, it should be signed and witnessed by shareholders who would otherwise be entitled to receive the share income. It should also be kept in the company records.
- It must be ready before the right to receive a dividend arises - to avoid it from being deemed as a false arrangement or a settlement on another shareholder for tax purposes.
- It should be used only for ‘good commercial reasons.’ A genuine reason for waiving a dividend can be - to leave the profits in the company. For example, to help invest in equipment which will improve profitability in the future.
- It must not create a case where a dividend waiver is deemed as a ‘settlement’ by HMRC. ‘Settlement of income’ occurs when income rights are shifted on to other shareholders as a measure to avoid tax. For example, if a dividend was declared for multiple shareholders and the business would not be able to afford payment to all shareholders - unless some waived their dividend rights.
HMRC will check if:
- The level of profits is enough to allow the same rate of dividend to be paid on all issued share capital.
- If you have had a series of waivers over the years where total dividends exceeded accumulated profits; even if you have sufficient profits to pay the same rate of dividend to all the shareholders.
- If there had not been a waiver, the same rate would not have been paid out on all the shares.
- The shareholders who have not waived dividends are persons that HMRC might reasonably regard as persons the waiving shareholder might wish to benefit from the waiver.
- The non-waiving shareholders would pay less tax than the waiving shareholder.
It is important to seek an accountant's help when waiving dividends to avoid HMRC attacks and scrutiny.
You can also read about Board meeting minutes and Dividend vouchers and download free templates here!
