Dividend diversion scheme used to fund education fees (Spotlight 62)
Find out about tax avoidance schemes used by owner managed companies to fund education fees.
HMRC is aware of a tax avoidance scheme being marketed as a tax planning option available to help fund the cost of education fees. The arrangements are targeted at individuals who are the directors and main shareholders of a company (an owner managed company).
HMRC’s view is that this scheme does not work.
How the arrangements are claimed to work
The arrangements seek to avoid tax by allowing the directors, who are also the main shareholders (the owners) of a company, to divert dividend income from themselves to their minor children.
The arrangements work as follows:
- a company issues a new class of shares which usually entitles the owner of the shares to certain dividend and voting rights
- Person A, usually a grandparent or sibling of the company owner, purchases the new shares for an amount significantly below market value
- Person A usually gifts the shares to a trust or declares a trust over the shares for the benefit of the company owner’s children
- Person A or the company owners vote for substantial dividend payments in respect of the new class of share
- this dividend payment is paid to the trustees of the trust
- as the beneficiaries of the trust, the company owner’s children are entitled to the dividend
The company owner’s children pay tax on the dividend received. However, they pay much less tax than if the company owners received the dividend due to their children’s:
- £12,570 tax-free personal allowance
- £1,000 dividend allowances
- eligibility to the dividend basic tax rate
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 S619 onwards that prevents this type of arrangement providing the tax advantage that is sought. Arrangements which operate in a similar way may also be caught by this legislation.
What to do if you’re using this or similar arrangements
If you’re worried about becoming involved in a tax avoidance scheme, or think you’re already involved and want to get out of one, HMRC can help. HMRC offers a range of support to get you back on track or avoid being caught out in the first place. Contact HMRC if you have any concerns.
If you’re using this or similar schemes or arrangements, HMRC strongly advises you to withdraw from it and settle your tax affairs.
If you’re using this or similar schemes or arrangements, HMRC strongly advises you to withdraw from it and settle your tax affairs.
Anyone concerned about the schemes they are currently using should consider:
- getting independent professional tax advice
- speaking to one of the tax charities such as TaxAid — find out more about the TaxAid helpline on the TaxAid website
What this means for promoters
Scheme promoters must comply with the disclosure of tax avoidance schemes (DOTAS) legislation ensuring that arrangements they are marketing are disclosed to HMRC.
Promoters will be liable to a penalty if they fail to disclose a scheme to HMRC within 5 days of the scheme being made available or implemented. The initial penalty is up to £600 a day. If this is not considered to be sufficient deterrent promoters may have to pay a penalty of up to £1 million.
HMRC will pursue anyone who promotes or enables tax avoidance. This includes using the enablers penalty regime for anyone who designs, sells or enables the use of abusive tax avoidance arrangements which are later defeated by HMRC.
HMRC will also use its powers under the Promoters of Tax Avoidance Schemes regime against those who continue to promote tax avoidance schemes.
Report a scheme
You can report tax avoidance arrangements, schemes and the person offering you them to HMRC by using our report tax fraud online form. You can submit this form anonymously and do not have to give your name, address or your email.
You can phone HMRC if you cannot use the online form.