Are dividends still a viable option in a post-Covid world?
Can our family business still pay dividends in a world full of furlough?
The current economic environment has been described in many ways from “challenging” to “brutal” and “utterly depressing”. Over 9 million employees are and have been on furlough since 1st March and over £25 billion has been paid out by the Government via the Coronavirus Job Retention Scheme.
However, following ‘Independence Day’ on 4th July, we have seen more businesses across the UK returning to work and sales starting to increase. Family business owners, as well as those on furlough have also had to really think about personal finances during this time and how they can keep the business going whilst ensuring they can pay bills and keep the business afloat.
CJRS and a range of other Government support measures have helped family businesses considerably over the last few months, however as work starts to return, one question that has been asked is whether dividends can still be paid?
Before we delve into if they can be paid, it is important to ensure that any dividends are paid from qualifying distributable reserves and that the distribution of dividends are based on shareholdings – i.e. it cannot just be salary rebranded as a dividend. There are practical accounting points that need to be reviewed to ensure that a dividend can be declared and that it is done so in the right way for each shareholder. A mistake at this basic level can be costly and it is an area of review for HMRC particularly as we move forward beyond the pandemic.
The interactions – dividends and furlough
Using the Government’s CJRS arrangement has been key to protect jobs and give employers cash to pay their employees over the last few months.
Where family businesses are considering dividends and have used CJRS for furloughed employees, there are currently no rules, legislation, guidance or directions that prohibit this. The main requirement for UK businesses is to be able to clearly demonstrate that the employee’s employment activities have been “adversely affected” by the Coronavirus.
There is no mention of CJRS not being applicable if you make profits, have a turnover over a certain limit, make redundancies or if you decide to pay out bonuses or dividends, or that in such cases your CJRS claim will be rejected or retrospectively over-turned.
However, reputation and retrospection will be critical and this is an area in which family businesses could be more vulnerable – if your name is above the door then you don’t want to put your reputation at risk. The Government could change / modify the rules in the future given the reactive nature of the CJRS guidance and directions to date. Demonstrating the right behaviours and robust governance will be key in managing the risk of HMRC successfully challenging any claims that have been made, so think carefully about the next steps you take.
Will there by naming and shaming if CJRS has not been claim correctly or used as intended?
Currently there are no proposed rules or regulations to impose naming and shaming on those employers found to have used the CJRS arrangement incorrectly. However, public pressure and scrutiny on pay dividends will be at a heightened state given the amount the Government has paid out in CJRS claims to date (over £25 billion).
Therefore businesses need consider the possibility that naming and shaming could be applied, akin to how ‘naming and shaming’ operates for National Minimum Wage rules. Retrospective legislation could potentially be introduced to restrict dividends and bonuses being paid where public funds have been claimed via CJRS – employers could be made to pay CJRS back where this has occurred.
Will we get a penalty if we pay dividends whilst we have claimed under the CJRS arrangement?
In terms of penalties, paying dividends itself will not crystallise a penalty and from a strict position, no penalties are proposed to be directly levied where qualifying dividends have been paid.
What about Time To Pay (TTP) Arrangements?
Alongside CJRS, many businesses have deferred their income tax and NIC liabilities. HMRC are now in the process of formalising these deferrals into TTP so that historic deferrals can be paid over the next few months, or longer, depending on what is agreed.
In terms of agreeing TTPs, HMRC are traditionally less sympathetic to requests for instalment arrangements if there is evidence of recent dividends paid to shareholders. Quite often, they also expect other investors such as Loan Note holders to take a deferral of interest in the supporting cash flow projection too. This is an area in which family businesses need to take care, especially where they are reliant on dividends from a personal financial planning perspective.
What should we be doing next?
Family businesses need to ensure they are continuing to behave with integrity and in the spirit that CJRS was intended to be used. Where the media and the public become aware that businesses have not acted reasonably, this is likely to generate negative attention and could have an impact on the long term success of the business given the reputational damage that could arise.
There is a balance to strike as family businesses will still need to reward individuals to help them grow in the future, otherwise key talent may look to leave and go elsewhere and this could also scupper any long term succession plan.
Reviewing pay and reward structures, as well as considering the wider compliance and risk aspects attached to dividend and bonus payments will help organisations ensure they have the right structures in place as they look to grow in the post Covid-19 climate. One area that has been discussed more recently is Enterprise Management Incentive schemes (EMIs) and this is something many businesses are looking at, given the tax advantages associated with these arrangements where set up correctly.