I saw a client today who is self employed and pays himself in monthly dividend payments - which are tax free.

Does anyone know how these affect benefits - I couldn't find anything in the usual sources. My gut feeling is that they are capital, but usually they are only made annually. If there regular monthly payments would they be income?

If they are capital, could a claimant who 'pays' himself in this way fall foul of deprivation rules?

Also, the client said that no claim for tax credits has been made as it would upset the workings of the business. I can't see this myself, but its not my thing... Does anyone know what concerns the claimant might have about this? As far as I can tell, dividend payments, as a non-taxable income, would not be counted as income for tax credits.

Thanks as always for any replies.

Tony

Hi Tony

I would argue that they are treated as capital under reg 48(4) of the IS Regs (income from capital treated as capital). As the payments would be disregarded as income under paragraph 22(1) of schedule 9 then the deprivation rules shouldn’t apply.

Don't know anything about his business concerns either.

Regards
Paul

Dividends are investment income, and like all other actual investment income are disregarded in most means tested benefits (but not tax credits) in favour of the dreaded tariff income from investments. Since shares in a private company are rarely worth very much, you may not have a problem with excess capital or tariff income, but it may be wise to get some advice on the valuation of the company and hence of your client's shares in it.

Also, I thought dividends were taxable, but you can't reclaim any tax paid on them if you are not a tax payer?

Thanks for replies.

I have absolutely no idea Ariadne. I only know that I've seen clients that tell me they pay themselves in dividends to avoid income tax.

I do a self-assessment every year - that's about as much as I want to know about tax!!!

I've advised client make claims. There should hopefully be no problem with CTB as he no longer receives any income from the business. I've adivsed to enter income for tax credits in line with the TC600 notes book which asks for figures from tax returns.

Thanks again,

Traditionally people used dividends to avoid NI contributions rather than tax. It's a little complicated because dividends are taxable but, often, some of the tax is paid by the company issuing the dividend. They're taxed under income rules by HMRC not capital rules, so you might expect them to be income for IS etc. but IS (Gen) Regs, reg 48(4) says

(4) Except any income derived from capital disregarded under paragraph 1, 2 4, 6, 12 or, 25 to 28, 44 or 45 of Schedule 10, any income derived from capital shall be treated as capital but only from the date it is normally due to be credited to the claimant's account.

However, this raises some issues if this dividend income is the only income received from the business.

Firstly, in the absence of pay then is the work carried 'in expectation of payment'? CIS 434/1994 says that it is

"...it can also be said, as one would reasonably suppose, that once the Company was in profit and past losses accounted for, payments would be made to Mr H and Mr F either as salary, Director's fees or dividends - it matters not which.

7. The question which I have to address is:-

"Was the work in which Mr H was engaged on behalf of the Company work for which payment was made or which was done in expectation of payment?"

8...

9. ...The fact that they were not paid is immaterial: the prospect of future earnings was enough."

More interestingly, is the value of the business ignored as a capital asset because the claimant is self-employed under IS (Gen) Regs, Sch 10, para 6

"(1) The assets of any business owned in whole or in part by the claimant and for the purposes of which he is engaged as a self-employed earner"; If not then you need to get a valuation of the business as it will be capital.

If it is then IS (Gen) Regs, reg 48(4) above may apply (...disregarded under paragraph ... 6) and the dividends treated as income, with the usual rules on periods etc.

For TC purposes then, under Tax Credits (Definition and Calculation of Income) Regulations 2002, Reg. 10(1), dividends are treated as investment income and taken into account.

Is the person really self employed?

The fact that he receives dividends suggests that they are being paid by a limited company, probably set up by himself.

If this is the case then a decision maker may well decide that since the dividend payments are received regularly they are payments of income and not capital. Alternatively the notional income regulation which (paraphrased) says thet where A works for B, and B does not pay the going rate, then for benefit purposes A should be treated as receiving the going rate unless he can show that B is unable to pay it could be invoked, because clearly the company can afford to pay £600 per month.