HMRC warning on undeclared dividends

Introduction

The HM Revenue & Customs (HMRC) has initiated a campaign targeting company directors suspected of earning dividends without declaring their taxable income. This concerted effort aims to ensure compliance with tax obligations and address potential instances of dividend income underreporting, based on depleted reserves shown in accounts submitted to Companies House by profit making companies. 

Letter Campaign

In the latest phase of this campaign, HMRC has been sending letters to company owners, alerting them to the possibility of needing to declare dividend income. These letters serve as a proactive measure to prompt individuals to review their tax affairs and rectify any discrepancies.

Investigation of Company Reserves

HMRC’s investigations have focused on company reserves, identifying instances where companies have generated profits yet depleted reserves, suggesting undisclosed dividend payments. Company owners are provided with the opportunity to disclose any undeclared dividends or clarify if there are no additional dividends to declare.

Impact of Dividend Allowance Changes

The reduction in the dividends allowance, from £1,000 to £500 starting April 2024, is anticipated to affect a significant number of taxpayers, with projections indicating 3,250,000 individuals impacted in 2023 and 4,405,000 in the 2024-25 tax year. This adjustment is expected to generate increased tax revenue, projected at £450 million in 2024-25 and rising to £810 million in 2025-26.

Notification and Penalties

Taxpayers are provided with a 30-day window to notify HMRC if no further dividend declarations are required. Failure to disclose accurate information may result in penalties equivalent to the tax due, alongside daily interest charges for late payments. To facilitate disclosure, an online registration facility is available, enabling companies to declare owed amounts and settle penalties once a payment reference number (PRN) is received.

Compliance Deadline and Enforcement

Following the issuance of a PRN, companies are given a 90-day deadline to complete the disclosure process. Failure to meet this deadline may trigger HMRC compliance checks, with potential for escalated penalties if undeclared dividend payments are uncovered.

Legislative Changes and Policy Objectives

Legislative changes, including the halving of the dividend allowance from £2,000 to £1,000 in April 2023, and subsequent reduction to £500 in April 2024, are aligned with the government’s objective of ensuring fiscal sustainability. Dividend income from assets held within Individual Savings Accounts (ISAs) remains exempt from taxation, providing continued tax efficiency for investors.

Implementation Costs and Estimates

HMRC estimates implementation costs of £700,000 for the changes to the dividend rules, reflecting the resources allocated to enforce compliance and administer the campaign effectively.

Conclusion

The HMRC’s dividend disclosure campaign underscores the importance of accurate reporting and compliance with tax obligations. Through proactive communication and enforcement measures, HMRC seeks to uphold tax integrity while supporting the government’s fiscal objectives. Compliance with disclosure requirements is paramount to avoid penalties and ensure continued tax compliance for company directors in the UK.