When a company is set up, it is common to divide the shares in it in approximately equal proportions amongst the subscribers. Whether or not this proves to be the most effective way to split them in the long run depends on a variety of factors, of which the effect on the governance of the company is normally the most significant. However, one problem which sometimes results is that where dividends are paid in proportion to the shareholdings, this can lead to dividends being payable to a shareholder who does not need them or who would have to pay higher-rate tax on them.

When a shareholder does not wish to receive a dividend, this can be effected by the execution of a dividend waiver. The use of such waivers can be an effective tool in tax planning, so it is unsurprising that HM Revenue and Customs (HMRC) are generally not keen on them. Unless a dividend waiver is executed in the right way, HMRC are likely to use anti-avoidance legislation to attack the scheme.

The essential steps are:

1. The dividend waiver must be a formal election by the person entitled to receive the dividend. It must be done on paper in appropriate form and dated and witnessed;
2. The waiver must be executed before the dividend is declared; and
3. It is always better if there is a commercial reason for the dividend to be waived – this will normally be to allow the company to retain funds for some specific purpose.

It is unwise to use dividend waivers too frequently. HMRC will look more closely at arrangements which are repeated and the practical effect of which reduces the overall tax payable – for example, where the shareholder executing the waiver is a higher-rate taxpayer and the shareholder who receives the dividend is not.

HMRC regularly attack such schemes - with mixed results. HMRC were recently criticised by the judge hearing their claim that an 'A'  and 'B' share structure in a husband and wife company was a 'settlement' of income by the husband on the wife...in the view of the judge, the income received by the wife was not commensurate reward for the financial risks she took.