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Category: UK Tax
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Experience:  Chartered Accountant >20 years + Qualified IFA
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How does a Company pay HMRC the tax due on Equity dividends

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How does a Company pay HMRC the tax due on Equity dividends (10% deducted before paid) ?

MamaTax :

Hi Its MamaTax Here!

MamaTax :

Thanks for the question.

MamaTax :

The 10% tax credit is a notional tax. ie not actually paid to HMRC.

MamaTax :

This is best illustrated in an example.

MamaTax :

If a company declares £9,000 dividend on the net income of the company. The taxman realises that the shareholder will receive the £9,000 but this is already taxed as it is paid out of net income and therefore recognizes the notional tax credit to be credited to the shareholder receiving the dividends. The shareholder will gross up the dividends on this tax return by 10/9 hence show £10,000 dividend income and a tax credit of £1,000 ie the net income is £9,000. If the shareholder is a basic rate payer, there is no further tax charge - meaning that the taxman has taken into account the fact that the dividends were already taxed as these were paid from company net income....otherwise the shareholder will be suffering tax twice on the same income.

MamaTax :

However a company needs to keep proper records for the dividends and this includes complying with the company requirements on dividends, having enough reserves and the rest of the details below:

MamaTax :

For each dividend payment the company makes, you must write up a dividend voucher showing the:



  • date

  • company name

  • names of the shareholders being paid a dividend

  • amount of the dividend

  • the amount of the ‘dividend tax credit’

MamaTax :

You must give a copy of the voucher to recipients of the dividend and keep a copy for your company’s records

MamaTax :

The recipient will use this voucher for their tax returns as supporting details/papers for tax purposes.

MamaTax :

Otherwise there is nothing you need to do with regards XXXXX XXXXX 10% tax is as far as the company is concerned. The notional tax credit is largely irrelevant to the company.

Customer:

The dividend will be sent to the only shareholder ( in Luxembourg ). As I understand it we here in UK should deduct the 10% or???

MamaTax :

Ok. If dividends are paid out from UK company to a shareholder outside UK, in your case Luxembourg there could be withholding tax. This is guided by the Double tax agreement between UK and Luxembourg. Give me some couple of minutes to go through the agreement and see if there is any w/tax implications.

MamaTax :

I suggest you log off and get back in 20 so minutes. I will post my conclusion then. Thanks

MamaTax :

 


Just had a quick look at the DTA between UK and Luxembourg. The withholding tax on dividends is 15% as shown HERE and HERE. However there are various exemptions in those links that can exclude a UK company from paying a full 15% withholding tax and these are determined by the relationship between the UK company and Luxembourg eg whether the Lux recipient is a company or individual; and the shareholding; local tax treatment of the dividends, any participation exemptions etc. My advice is if you are thinking of declaring the dividends you might hire a specialist tax expert on DTA who will look at both UK and Lux; the recipient's tax position before making the dividends. Most DTA experts charge say £200-£500 to look a transaction like this in detail. You can find one by simply googling or post your requirements on sites Find-an-accountant or Uktaxadvisors.com listing your requirements.

MamaTax :

Let me know if you have any further comments. If you are satisfied, i would greatly appreciate your rating.

Customer:

What would you suggest. This will be a one off dividend for about £ 13000. It will be paid to a small reg. Company in Luxembourg. Should I just send the money and let them sort out their tax?

Customer:

We can't afford the special advisor. The UK Co. is now dormant.

MamaTax :

Thanks for the reply. My advice is to address the tax situation in as much as you can just to avoid penalties in the future. As you can see from the DTA links above, the general w/tax is 15% but there few exemptions and a reduced rates of 5% that can apply and the savings from using different rates can be huge. It also depends on whether the company is Lux is entitled to a full credit of 15%. If it is then paying the w/tax would be the safest way. But if i were you i would ask the small company in Lux to consider looking at a specialist and them to pay the fee.

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