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HMRC have posted on their website this week that PA Holdings have withdrawn their appeal against the latest court decision against them – i.e. PAH have accepted HMRCs views.

The case concerns whether dividends are employee income or not, and inevitably gives rise to concerns about whether dividends are going to be subject to NI.

Our view is there is little for most businesses to worry about.

By way of background, its generally accepted that dividends are more efficient than salary for small business, subject always to IR35 considerations.   However for the most part the saving comes from NI rather than tax – broadly the tax position of salary v  dividend is neutral, its the NI status that makes the savings.

In the PA Holdings litigation, HMRC had argued – and the tribunals and courts agreed – that dividends paid to staff had the fundamental nature of employment income not investment income/return on capital.

However the circumstances of the case are a considerable way off from those of most smaller proprietorially controlled small businesses.   PA Holdings was a large business with a number of regular staff, i.e. not owning any part of the business, and to enable a tax/NI efficient bonus to be paid to staff they set up a subsidiary and offered staff shares in the subsidiary – the subsidiary didn’t do anything, it simply received funds and distributed them as dividends to staff.

In essence this was nothing more than clever tax planing – too clever it seems – to try and save NI on staff bonuses.

There is no suggestion that HMRCs victory in this case is an attack on so called “regular dividends” – i.e. those paid to bona fide business owners / shareholders.

Theres a useful background article in the CIOT magazine – although the article is dated last year, it summarises the points quite well.