HM Revenue and Customs (HMRC) has launched a targeted effort to counter the utilization of a dividend diversion scheme frequently adopted by owner-managed companies for the purpose of financing education expenses.
This initiative is accompanied by the introduction of a new "Spotlight" publication, unveiled in conjunction with the August 2023 edition of the Employer Bulletin, released on August 16, 2023.
Spotlight 62 underscores HMRC's awareness of a tax avoidance scheme that is presently being promoted to owner-managed firms. The scheme's objective is to redirect dividend earnings from business owners to their underage children. Promoted as a tax planning solution, the scheme aims to financially support educational fees for children.
The scheme's mechanics attempt to circumvent taxation by enabling directors, who concurrently hold significant shares in the company, to channel dividend income away from themselves and towards their minor children. Tax obligations are then imposed on the dividend earnings received by the children. However, due to the children's tax-free personal allowance amounting to GBP 12,570, a GBP 1,000 dividend allowance, and their eligibility for the dividend basic tax rate, their tax liability is substantially reduced compared to what their parents would be subjected to if they received the dividend.
HMRC has unequivocally expressed that it deems this scheme ineffective. According to the agency, the scheme's arrangements fall under the scope of specific anti-avoidance legislation stipulated in the Income Tax (Trading and Other Income) Act 2005, spanning from section 619 onwards.
To individuals who have become involved in this scheme, HMRC strongly advises prompt engagement with the agency. HMRC stated, "If you are aware of people selling this or any other type of tax avoidance scheme you should report it to HMRC so we can help protect you and others from the risk of tax avoidance."
If you require assistance in relation to the above and/or would like to discuss anything further, please do not hesitate to contact firstname.lastname@example.org or your usual A.C.T. contact.