On April the 6th the higher rate tax will come into effect with a liability of 50 pence in the pound. Tax advisors had been suggesting that limited company owners may wish to bring forward dividend payments this year to avoid this tax burden. However, it would appear that HMRC have caught up with this advice, according to accountancy firm Smith & Williamson. This means they are one step ahead of any companies who attempt to pursue this route.

Their tax director, Richard Mannion commented: “HMRC will take a special interest in dividends paid towards the end of the tax year to check that have been properly and legally paid. So if anyone plans on bringing forward their payment date, they must prove that payment is made before 5th April 20120 and that it relates to profits earned up to that period.”

Smith and Williamson did concede that HMRC could actually have placed a ban on early dividend payments therefore an investigation into anyone employing this tactic is the least restrictive option. However, Mr Mannion believes that it is not the “easy option for government” as this clampdown is “akin to retrospective legislation”.

The bottom line is that any companies paying out dividends must be able to show that there are sufficient company reserves to distribute the dividends through their supporting accounts. Also, bringing forward dividends requires careful consideration as it could effectively force someone into the higher tax bracket.

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