What is a Dividend Waiver
A dividend waiver is a formal and legal document where a company's shareholder voluntarily gives up their right to receive a dividend. This can be for either a specific period of time or for a particular dividend declaration (e.g. for one accounting period).
The waiver will not affect the rights or distributions of any other shareholders where they will continue to receive the agreed rate per share. The portion of dividends not received by the particular shareholder stays in the company's profits and can then be distributed between the remaining shareholders.
Why a Dividend Waiver?
Company shareholders may want to declare a dividend waiver for a number of reasons.
Typically dividends should be waived for commercial reasons, such as to help retain funds for the business to use, like for future investments or purchases, or so that the profits distribute more efficiently between it's shareholders.
Companies usually pay dividends to the shareholders at the same rate per share owned. This structure may not work the best for retaining company profits for every accounting period, so preventing certain shareholders from receiving a dividend may be beneficial.
In the waiver, the shareholder should disclose any and all reasons for this, as HMRC can often query a shareholders motives. If a company completes a dividend waiver with the sole intention to reduce and mitigate tax, then HMRC can investigate this.
Other reasons why a shareholder might want to complete a dividend waiver include, if an original shareholder is currently an inactivate part of the company (would not be considered a director and have everyday duties) but still wishes to retain their original shares in the business.
How to Report
Shareholders must use a formal deed of waiver to let the company know of the decision to give up the rights to certain dividends. The deed must be in the form of a document, where there are many templates for dividends waivers you can find online!
What is Recorded?
The following is a list of items typically recorded and displayed on the dividend waiver:
- Company name and registration number
- Registered office address
- Date of issue
- The name of shareholder giving up receiving dividends
- Number of shares (and their share class) that the shareholder possesses
- Clear statement that the shareholder is waiving their right to receive any dividends for the period specified
- Signature from the shareholder (and date of signature)
Witness to the Waiver
In order to confirm the waiver, a witness must be present (physically there when the deed is being authorised). The document should include a copy of the witnesses name and address as well as their signature.
To be a witness for a dividend waiver it is not necessary for you to be a legal professional, you would only require to be at least 18 years of age as well as not being party to the deed. In most cases, it is better that the witness is an individual who is not related to the shareholder, and wouldn't benefit from the waiver, for example a family member of a shareholder.
Once the company directors receive the dividend waiver then they should record their acceptance of the document, as well as keep a copy of the record (physical or digital).
Final Dividends
It's important to time the declaration of waiving dividends. The waiver must be put in place before the final set of dividends are claimed by the shareholder. The shareholder will typically declare the final dividend in an annual general meeting (AGM) once the final company accounts have been approved. Then for proceeding accounting periods the dividends will be withheld from this shareholder.
Tax Benefits
Tax efficiency - If a shareholder is a higher rate taxpayer, then they want to use a dividend waiver to avoid paying more tax on their income. Choosing not to receive the dividends means reduces their overall income - may not take them over the basic-rate threshold.
Vulnerability to Challenge
There will always need to be a valid commercial reason for a shareholder implementing a dividend waiver; a reason to help business grow. In light of this, any reasons to help benefit a shareholder personally should be avoided in order to remain compliant with HMRC.
Typically HMRC will challenge the issue of said waiver if there appears to be a tax avoidance scheme. HMRC will more likely challenge shareholders who seem to use the waiver in order to give a tax advantage to a family member, and who have a history of repeated waivers.
Ending a Wavier Early?
Currently, there is no formal procedure for ending dividend waivers. Once the waiver has been executed and signed, then the shareholder will not receive the dividend amounts for the specified period or periods. Therefore making this process irreversible.
In most cases, shareholders limit dividend waivers to cover periods of up to 12 months, in order to avoid scrutiny from HMRC. So for waivers covering only one accounting period, the shareholder would be able to receive dividends as normal the following period.
Alternative to Dividend Waivers
There are alternative ways of preventing some shareholders/directors from receiving dividends, helping to retain company profits, other than dividends waivers:
Using different share classes - Within a company different share classes (Class A vs Class B shares) can be allocated to different shareholders. If only certain classes of shares have dividend rights applied (for example Class A only), then the shareholders with Class B shares wont received any dividends. This then negates the need for a dividend waiver.
Key things to Consider
- Shareholders of companies can use dividend waivers in order to stop a specific shareholder from receiving dividends, this can in turn retain more of the company profits.
- Acceptable reasons for this primarily involve benefitting the company directly; retaining the profits for future asset purchases or investments. HMRC can scrutinise the waiver if it is used for personal gain or to avoid tax.
- In this light, if you are looking to complete a dividend waiver for the company, then it would be best to avoid completing them frequently. HMRC can often challenge repeat waivers to ensure that these have commercial intent rather than for personal tax avoidance reasons.
