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.
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