Performance related dividends

George

I have been doing the self assessment tax of an engineer who has recently been made redundant. He is considering setting up a limited company with two other workers who have also been made redundant. I appreciate the pitfalls and complexities of IR35, but can anybody enlighten me about 'performance related dividends'. Is this a possibility, and how is it implemented?

Thank you in advance. Any helpful comment will be appreciated.
George

deanshepherd

Google 'alphabet shares' and that will explain how performance related dividends work (or don't as the case may be).

farmergiles

George wrote: »

I have been doing the self assessment tax of an engineer who has recently been made redundant. He is considering setting up a limited company with two other workers who have also been made redundant. I appreciate the pitfalls and complexities of IR35, but can anybody enlighten me about 'performance related dividends'. Is this a possibility, and how is it implemented?

Thank you in advance. Any helpful comment will be appreciated.
George

Not sure why you would have problems re IR35 or performance related dividends.
If the three workers are setting up a Ltd Co between them then wouldn't all three be Directors? All three be entitled to Directors fee's and dividends payable from the profits of the company? The Ltd Co would invoice for the engineers time etc and the client would pay the Ltd Co. The Directors would each draw a "Fee" of, for example, £6600 a year, on which they would pay a small amount of tax/ni and all other drawings would be classed as dividends.
I would have thought that IR35 would only come into the equation if they received a permanent contract, without right of substitution and with all expenses paid and the ablility to put right mistakes at no cost to themselves.

Providing they all contribute equally to the formation of the Ltd Co, all contribute equally to the earning capability of the company and all contribute equally to the running costs of the company, there should be no need to issue any other than ordinary shares, 1 each.
Unless one of my more experienced colleagues has a better view.

Kind Regards
Peter

deanshepherd

farmergiles wrote: »

Providing they all contribute equally to the formation of the Ltd Co, all contribute equally to the earning capability of the company and all contribute equally to the running costs of the company..

Presumably this is not the case otherwise the OP would not have asked about performance related dividends.

Sounds to me like 3 engineers wanting to go out and work individually but share the costs of setting up and running a company. I too would be concerned about differing profit entitlements and potential IR35 problems.

George

Thank you, both.

Yes they are obviously concerned to minimise their tax and NI obligations, hence the enquiry about dividends. It's just that they anticipated that the effort to generate and perform work may vary, and a way of rewarding each director accordingly, is being sought. It sounds like Pandora's Box to me!

Wouldn't it be better to remunerate proportionately by bonuses and suffer the extra tax, or am I missing something?

deanshepherd

It can certainly get messy.

I have a client in a similar position and we do it this way:

- Lowest earning director gets a dividend;
- Higher earning directors get excess as a bonus.

E.g. Let's say in month 1 Director A wishes to remunerate himself £10k, Director B £12k and Director C 15k. They each get a dividend of £10k, Director B also gets a £2k bonus and Director C a £5k bonus.

It isn't ideal and they may well be better off having their own companies but we can only lead them to the water..

George

Thank you, Dean. That is very helpful, as, I've noticed, are all your responses that I have come across on this site. Not only are they lucid and informative, but they are always moderate, and never disparaging towards the questioner. Three cheers for you.