Spotlight 62: Dividend diversion scheme used to fund education fees

HMRC have published tax avoidance Spotlight 62 ‘Dividend diversion scheme used to fund education fees’.

This publication follows the recent discussion of such arrangements, which are targeted at individuals who are the directors and primary shareholders of a company.

The arrangements, which are marketed as tax planning, seek to avoid tax by allowing the director-shareholders to divert dividend income from themselves to their minor children.

The arrangements work as follows:

1. A company issues a new class of shares which usually entitles the owner of the shares to certain dividends and voting rights.
2. Person A, usually a grandparent or sibling of the company owner, purchases the new shares for an amount significantly below market value.
3. Person A usually gifts the shares to a Trust or declares a trust over the shares for the benefit of the company owner’s children.
4. Person A, or the company owners, vote for substantial dividend payments in respect of the new class of share.
5. This dividend payment is paid to the trustees of the trust.
6. As the beneficiaries of the trust, the company owner’s children are entitled to the dividend.

The company owner’s children pay tax on the dividend received. They pay much less tax than if the company owners received the dividend due to the children’s personal allowance, Dividend allowance and basic rate band. 

HMRC’s view is that this, and similar schemes, do not work as the arrangements are caught by the Settlements anti-avoidance legislation.

• Anyone who is using these or similar schemes is strongly advised to seek professional tax advice, withdraw from them, and settle their tax affairs.
• Scheme promoters are required to comply with the Disclosure of Tax Avoidance Schemes (DOTAS) legislation and may be subject to Penalties if they fail to comply. 
• Enabler penalties also apply to anyone who designs, sells or enables the use of abusive tax avoidance arrangements which are later defeated by HMRC.

Tax avoidance arrangements, schemes and promoters can be reported to HMRC by using the report tax fraud online form, which can be submitted anonymously. 

Useful guides on this topic

Settlement anti-avoidance rules
What are the settlement anti-avoidance rules? How do these rules catch some common family tax planning? What are the rules for spouses and other family members?

ABC or Alphabet shares: Family companies
This guide examines the tax consequences of creating new share classes in a family company in order to split income with a spouse or close family members. 

Dividend tax (subscriber guide)
This practical tax guide explains how dividends are taxed on or after 6 April 2016. It includes HMRC's own examples, more detailed examples, including an Owner Managed Business (OMB) section together with tax planning tips.

DOTAS: Disclosure of Tax Avoidance Schemes
What are the Disclosure of Tax Avoidance Schemes (DOTAS) rules? When should you disclose your use of a tax avoidance scheme? What are the consequences of non-disclosure? How are penalties calculated?

Promoters of Tax Avoidance Schemes (POTAS)
Who is a Promoter? What are the Promoters of Tax Avoidance Scheme rules? What does this mean for promoters, intermediaries and clients?

Penalties: Enablers of Tax Avoidance (subscriber version)
What penalties apply to Enablers of Tax Avoidance? When do they apply? Who is an enabler?

Tax avoidance schemes
How do you spot tax avoidance schemes? What are the types of schemes available that should be avoided? What disclosure requirements are there? When are tax clearances needed?

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Spotlight 62: Dividend diversion scheme used to fund education fees