You may not have heard of S455 tax. It may have been something that made your eyes glaze over when brought up in finance meetings. In short, it is imposed on companies that distribute profits to their shareholders in a way that avoids income tax. This typically occurs when a company pays a dividend to shareholders, and those shareholders are in a lower income tax bracket than the company itself.
The tax is calculated as the difference between the corporation tax that the company would have paid on the distributed profits if they had been retained in the company, and the income tax that the shareholders actually paid on the dividend. This difference is then added to the company’s corporation tax bill.
While it’s impossible to completely avoid S455 tax, there are several strategies that companies can employ to minimise their liability:
- Dividend Policy:
- Consider Alternative Distributions: Instead of dividends, companies can explore other ways to distribute profits, such as share buybacks or capital reductions. These methods may not trigger S455 tax.
- Timing of Dividends: Paying dividends at the end of the tax year when the company’s profits are lower can reduce the potential S455 tax liability.
- Dividend Reinvestment Schemes: Offering dividend reinvestment schemes allows shareholders to reinvest their dividends into the company, potentially avoiding income tax.
- Corporate Structure:
- Group Structure: By structuring the company within a group, profits can be shifted between companies to minimise S455 tax. However, this requires careful planning to avoid transfer pricing issues.
- Controlled Foreign Companies (CFCs): If a company has a CFC that generates profits, it may be subject to UK tax on those profits, potentially reducing the need for dividends.
- Tax-Efficient Investments:
- Corporate Investments: Investing company profits in tax-efficient investments, such as Enterprise Investment Schemes (EIS) or Venture Capital Trusts (VCTs), can reduce the company’s overall tax burden.
- Foreign Tax Credits: If the company generates profits overseas and pays foreign taxes, it may be eligible for foreign tax credits, reducing its UK tax liability.
- Employee Benefits:
- Salary Sacrifice Schemes: By offering salary sacrifice schemes, companies can provide employees with benefits that are exempt from income tax, potentially reducing the need for dividends.
- Company Cars and Fuel: Providing company cars or fuel allowances can be tax-efficient for employees, reducing their income tax liability and potentially minimising S455 tax for the company.
It’s clearly complex and one of those strategies best discussed with a well-brief tax team (here’s one!).
But S455 tax can be a significant burden for companies that distribute profits to their shareholders. So talk to us and let’s work out how you about the factors that trigger S455 tax and implementing appropriate strategies, so that we can help minimise the liability and improve overall tax efficiency.
