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Is it time to ditch the dividends?

Since lockdown, like countless others, I have become familiar with the many flavours of webinar providers and I suspect this will continue. I have presented webinars for the London Growth Hub, Newable, NatWest Accelerator and the Business Funding Show – with more to come.

I have covered my core subjects of R & D Tax credits, Innovate UK Grants, Covid-19 Grants and the bridging of all these where possible.

The audiences have been diverse – some established tech SMEs, some new, some scaling... the usual!

Other Finance people have presented on various topics, including the Furlough Grant covering 80% of wages, CBILs, Bounceback, Small Business Grants Fund, and others, the most recent being the just-launched Self Employed Income Support scheme

As always, there are questions during and after these webinars – and one of the most frequent has been around the subject of HMRC not recognising dividends as wages for the Furlough Grant.

Most SME owners/directors have been advised by their accountants that dividends are the most personally tax efficient way to pay themselves. ‘Small wages, big dividends’ has been the mantra for many, many years.

But HMRC cannot recognise dividends as wages. So, it’s no surprise that I have read articles in the press quoting many owners telling us it’s not fair.

The thing is, like many seasoned R & D professionals, I have lost track of the amount of potential money that SMEs were unable to claim back under the R & D scheme because they had been advised to pay themselves by dividend, which HMRC does not recognise. And let’s be frank here, what is more essential, the survival and growth of the business or the owner paying a bit more tax in the formative stages?

It took me back to long ago when, as an IFA with over 20 years’ experience, I would continually tell astonished company directors that mortgage companies would not take their dividends into account for house borrowing purposes.

So, dividends are not good for the Furlough scheme or R & D Tax Credits and won’t help you get a mortgage for your flat or house. Which leads me to my question: are dividends past their sell-by date?

Is it time to innovate on the dividend, cut it right back, and prepare for a potential further round of lockdown and furloughs? Indeed, should accountants advising directors to take dividends issue them with a wealth warning and put that advice in writing?

I suspect there will be many changes in the new normal and perhaps it is time to look at this particular issue now.