As part of the August 2023 employer bulletin and also spotlight 62, HMRC are communicating information on another failed tax avoidance scheme. They state that:
HMRC is aware of a tax avoidance scheme currently being marketed to owner managed companies, designed to divert dividend income from themselves to their minor children. The scheme is promoted as a tax planning option to help fund children’s education fees.
The arrangements seek to avoid tax by allowing the directors, who are also the main shareholders of a company, to divert dividend income away from themselves to their minor children. The children pay tax on the dividend received. However, due to the children’s £12,570 tax free personal allowance, £1,000 dividend allowance and their eligibility to the dividend basic tax rate, they pay much less tax than if their parents, the company owners, received the dividend.
HMRC’s view is that this scheme does not work as the arrangements are caught by specific anti-avoidance legislation contained in Income Tax (Trading and Other Income) Act 2005, from section 619 onwards, that prevents this type of arrangement providing the tax advantage that is sought.
If you or anyone at your business are using the tax avoidance scheme detailed in Spotlight 62, you should follow the steps outlined within it to leave and settle your tax affairs at the earliest opportunity.
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.
The means of implementing tax avoidance schemes can be imaginative and convoluted arrangements.
Some work and some don’t. Salary Sacrifice arrangements could be seen as provision of avoidance that may work where the associated benefit has tax reliefs, but even then care needs to be taken to prevent failure causing any tax or NI advantage to be lost.