To ask why people think directors that take dividends are tax avoiders?

[Milo2]

Small Ltd companies are currently left out of the UK government funding. Why? The directors still have families to feed and bills to pay.

I’ve seen a few people on here rubbing their hands with glee. Saying things like ‘good it serves them right for taking dividends’.

Some have compared directors to those that avoid paying tax and it’s completely unjustified.

Am I being unreasonable to ask why there is so much hate for these directors?

Also would you be upset if you had no hot water or heating to find that your local heating engineer had gone bankrupt and couldn’t help you? If so, why would you hate them so much when all they do is work hard and pay their taxes just like everyone else?

There is a whole lot of nonsense on this thread! DH and I run a small ltd company. For many reasons it made sense to change from self employed to a small ltd business (for example personal liability). Yes, we take a small wage and pay ourselves dividends. We pay 19% corporation tax on profits and then dividend tax on top of that for any extra money we take. No, we are not allowed to expense big meals out (I wish!). We have no job security, sick pay, holiday pay, pension contributions. It's fair there is a (small) tax incentive or why bother braving starting up your own business?

Monty, if you'd paid yourself a salary before corporation tax you'd be able to pay yourself maternity pay, sick pay, and now furlough money.

I agree there's a lot in the same boat. DH is a contractor working through his own ltd company but unable to work at present as there are literally no jobs, partly down to IR35 and now due to coronavirus. I'm a sole trader and also unable to work. DH pays himself a salary and takes dividends not as a tax dodge but because that's how it's done - also as outlined above pays VAT, corporation tax, and personal income tax. We are hoping we will be eligible at least for the 80% of his salary because at the moment we have no money coming in at all, and all our savings are spent, and we still have a massive corporation tax bill due. The government have said personal tax bills can be put off until 2021 but they will still need to be paid eventually and with what? Nothing said about corporation tax unless I have missed something.

One has to wonder why it hasn't been addressed before?

Because HMRC, the Treasury and successive Chancellors didn't want to address it. It goes right back to the mid 1990s. Gordon Brown has a lot to answer for as he actively encouraged people to set up/convert to limited companies. He was told by professional accountancy/tax bodies back as far as the late 90s about the problems with limited companies AND workable solutions, but he chose to do his own thing and ignored advice. That's led directly to where we are today. Had he dealt with the issue of the anomaly of double NIC on limited company directors, the 20 years of IR35 fiasco would have been avoided, and today's unfairness would have been avoided. But no, he knew best, and in fact encouraged hundreds of thousands of people to become limited companies by his ill fated and stupid tax incentives and reliefs ONLY applicable to small limited companies.

”There is no job security, as this covid has shown, no sick pay, no maternity pay, no holiday pay, no parental leave, no pension contribution from your "employer". You don't work, you don't get paid.”

Some of that is true but not all. You could choose not to pay into a pension if you like. You could choose not to take any holiday pay. But you remain entitled to both. And sick pay (which at the moment, your company could reclaim some of). And you remain entitled to maternity pay. When I had my youngest I was working for my own limited company. I received statutory maternity pay, funded at 104% by HMRC and because there was no income coming into the business as I wasn’t working, my accountant was able to claim the SMP up front from HMRC rather than afterwards.

I don't get why corporate tax is counted in personal tax. I have to pay tax on the house I let. It's not counted before I'm taxed on PAYE, but after.

DH pays himself a salary and takes dividends not as a tax dodge but because that's how it's done
It's done like that because it's a financial benefit!

Monty, if you'd paid yourself a salary before corporation tax you'd be able to pay yourself maternity pay, sick pay, and now furlough money.

1. There'd be double NIC to pay on the higher salary as well as income tax.

1. HMRC/Govt no longer fund sick pay, so the only "benefit" they'd have got would have been maternity pay - which may or may not have been on their radar.

As for furlough, no-one knew we were about to suffer a pandemic, no one knew how the govt would support workers unable to earn a living. A different govt could have done things very differently. I can't imagine many people willingly paying double NIC just in case there was a pandemic and just in case the govt of the time would use payroll as the benchmark for support - if anyone thought that way, they had one hell of a crystal ball.

I'd be interested in the very specific and niche circumstances in which you'd pay more tax Hinge?
I'm pleased you are interested. Please feel free to do some research. It is true, and not that niche - it involves getting paid a lot.

You are a business. Not self employed or an employee. The government has offered benefits to businesses. You need to take these up. Why should government suddenly treat you as self employed when you are not?

How would directors loans work in this scenario? I know someone who ‘paid’ themselves using one last tax year and doesn’t keep a reserve in the company.

I’m Ltd and work with a lot of other Ltds. When discussing the IR35 stuff recently it became apparent we were all doing it differently to one another and some were using the allowable benefits of being Ltd more fully than others. Like the example someone posted earlier I did the calculation versus PAYE and the overall difference to money in my pocket was a couple of thousand but to the person sitting next to me it was more like £10k. A small minority of people do well and truly take the proverbial (and accept the risk of investigation/fines that goes along with that) but most don’t. Cars (including leased) don’t work out any cheaper unless fully electric by the way and I don’t know anyone who has bought a caravan through the business lol.

FWIW I don’t think applying the 80% to dividends would work in the same manner as those paid predominantly by bonuses won’t get it. I don’t know what the fair answer would be though.

There is VAT to pay before corporation tax.
Usually for IT PSCs that will be at flat rate of around 14.5 (a lot less for other business types).

To put it bluntly I pay more in tax now than I EARNED gross as paye. When this is over I'll be looking for perm jobs paying around 40k if I'm lucky and the government will get a whole lot less from me.

But I'm okay with not getting a payout.
I'm not okay with the chancellor saying I don't put enough in, on the day I've paid 15k in corporation tax.

The key thing is that the business pays corporation tax, it isn't a personal tax. You then draw your salary or dividend payment from what is left.

So when you calculate PAYE v dividend, corporation tax shouldn't even factor into the calculation.

This is hilariously clueless. If you own the company, then corporate tax removes some of your profits. Which is perfectly reasonable. But it means that the funds available for dividends are lower. So, if your company bills 100k, and you have to pay out £20k in tax, you only have £80k remaining to pay dividends on.

The thing that a lot of people forget is that the slightly more tax efficiency of a small LTD was designed to encourage the creation of SMEs and to help them survive. In particular, cash flow is a HUGE issue. So by having relatively low salaries with dividends paid out periodically, these businesses can better manage their cash flow and put aside money (theoretically) as it comes in for both corporate and personal tax payments. Last week, I was chasing multiple large (for me) invoices from clients that had been issued in December and January. The total of invoices that had been issued in the 30-90 day period that had not yet been paid was equivalent to what I draw from the company for two months (salary and dividend). It was reassuring to know that if they hadn't been paid on time, I would only have been forced to pay salary and could delay the dividend payments.

And yes, of course there are other tax efficiencies. eg, my computer was purchased as a work computer. But I benefit on a personal level as well. Obviously as I also use it for non-work related activities (like mumsnet). Ditto my phone. But I'd argue that was true when I worked for a corporate too - they knew I used my computer/phone for personal use. But while there are some LTDs who completely take the piss and put everything through the business, most of us have accountants who don't recommend that. Mine would question anything that was obviously frivolous and would highlight any risks /illegalities.

Finally, another reason the government wanted to encourage SMEs is because we are significant drivers of the economy. We employ people, provide services etc.

The below comes from the government's business briefing in 2019:

"The usual definition of small and medium sized enterprises (SMEs) is any business with fewer than 250 employees. There were 5.9 million SMEs in the UK in 2019, which was over 99% of all businesses.
Micro-businesses have 0-9 employees. There were 5.6 million micro-businesses in the UK in 2019, accounting for 96% of all businesses."

Admittedly, we're not responsible for the bulk of income or employees but it's significant:

"Although the vast majority of businesses in the UK employ fewer than 10 people, this sort of business only accounts for 33% of employment and 22% of turnover."

None of this addresses the fundamental anomaly.

Sole traders get 80% of past earnings even if they are continuing to work, albeit a lower levels (although detail not yet know, they may get it if they have suffered no earnings drop!)

Directors only get 80% if they do no work at all which massively increases risk of business failure if they're not allowed to support their customers/clients in any form - that leads to customers going elsewhere and probably not returning.

That's a glaring anomaly that benefits sole traders far more than company directors, doing the same work. How is that fair?

And everyone I know who runs their own limited companies do expense things I have to pay for myself. Every single one.

@Kazzyhoward As a business you can claim other government help. Just do that.

And everyone I know who runs their own limited companies do expense things I have to pay for myself. Every single one.
What "things"?

There are lots of different scenarios here. Let's take 3 different people, each earning £50,000 per year:

1. Employee who is furloughed. Will receive £2,500 per month instead of £4,167 and must not work.

1. Director/owner on minimum salary of £8,600 per year plus £41,400 dividends. If they can be furloughed they'll get £573 per month

1. Self employed person - will get £2,500 per month BUT can continue working and earning their usual £4,167 per month (assuming their business is not affected.

If you increase total earnings to £60,000, 1 and 2 don't change, but suddenly 3 gets nothing at all.

There's nothing consistent about any of it but HMRC are doing what they can in the quickest way possible. Things may yet change.

I think maybe some of the posters on this thread who have such disdain for the self employed get sick pay, holiday pay etc, and are working from home still getting paid. When all this is over and you need your roof fixed, your hair cut, your car fixed etc, you might find the person you used has gone out of business.

As a business you can claim other government help. Just do that.

You mean like the loan scheme with high charges and which requires personal guarantees from the directors which put their home at risk if the business still fails??

Or the business rates grant which doesn't apply if you don't rent premises or sublet part of a building from someone else??

Personal expenses - trips away for weekends with a training day in the middle. They claim hotel for weekend and meals out. Mileage to travel from home to work. Books that interest them about their field of work. Magazine subscriptions. Lots of things that I have to pay for as an employee.

@LoafEater Most of us get statutory sick pay and little job security. And my DP is "self employed" i.e. made to be by his employer.

How can self employed people claim money and continue earning what they were earning?

Personal expenses - trips away for weekends with a training day in the middle. They claim hotel for weekend and meals out. Mileage to travel from home to work. Books that interest them about their field of work. Magazine subscriptions. Lots of things that I have to pay for as an employee.
Some of those are or may be legit, some not.
If you want to have a look at some generous expenses - take a look at MPs.
I claim travel expenses for the rare occasions I have to travel to customers - but it's not free money - it's less profit for my company.
You can't claim travel expenses for a regular commute (unless you're an MP) but most people can claim for travel to places they don't normally go to (or at least for the difference).
The hotel and weekends away are almost certainly illegal (if true) but as others have observed, not everyone takes the piss like this.

Personal expenses - trips away for weekends with a training day in the middle. They claim hotel for weekend and meals out. Mileage to travel from home to work. Books that interest them about their field of work. Magazine subscriptions. Lots of things that I have to pay for as an employee.

Trips away with a training day in the middle: if there genuinely is training, this is no different to the corporate "retreats" I went on when I worked full time. Similarly, almost every single person who travels for business at some point will tack on some person time on one end so that they get, in effect, a free flight to wherever they're going. I have seen small businesses not even bother with the "training" day and in that case I'd agree with you as per your comment on hotel/meal out.

Having said that: meals out - I do claim meals out that are with contacts or are work related. About 3 years ago, when business was really tough, I had dinner with a friend in my industry and, while I was embarrassed, I basically took the opportunity to pitch for work. I'd hoped she'd spontaneously give me work knowing what I do but that had never happened. Following that meal (which I paid for on the company) I have generated £20k in business from her. I consider that a legit business expense.

Books/Magazine subscriptions - when I worked in small companies, they were really good about paying for these. Weirdly, not so much in big companies - perhaps because it's harder to track in those? So again, it's a legit expense and really, it's a pity that other businesses don't provide more of this for their employees.

Your examples are weak. I went away at Christmas last year with the family. I did not expense a single item as it was a personal trip. Some people would have, and then yes, you'd have the right to question that. But that's not tax avoidance, that's tax dodging and is illegal.