Taxman loses as firms bring dividends forward

British companies paid out more than £840m in dividends to shareholders shortly before the end of the last tax year with the aim of minimising tax bills paid by investors, research published today will reveal.

Capita Registrars said dozens of companies brought dividends forward with the aim of paying them before the highest rate of income tax rose from 40 to 50 per cent on 6 April.

More than 200 companies paid dividends to shareholders between the beginning of 2010 and 5 April – the last day on which the 40 per cent income- tax rate was still the top rate. Of these companies, more than a tenth had last year paid dividends later.

Although not all of them will have brought payments forward purely to beat the tax hike, anecdotal evidence suggests that a sizeable number made the decision for this reason.

The total value of dividends paid by companies bringing forward their payments was £842m. Although the tax status of the individuals receiving the payments is not known, in theory the tax revenue lost to the Treasury due to the timing of the dividends could be as high as £85m.

High-profile examples of companies that brought forward pay outs in this way include Hargreaves Lansdown, the independent financial adviser, whose founders continue to have a large stake in the business.

In general, Britain's largest companies have been more likely to bring forward their staff's bonus payments to beat the tax increase, rather than confront the administrative difficulties of changing the timing of dividend payments. However "some smaller stocks may have brought forward their dividend payments to the 2009/10 tax year deliberately to beat the 50 per cent top rate," said Paul Taylor, head of dividends at Capita Registrars. "Smaller companies are more likely to have owner-managers who have greater flexibility over how they provide returns to themselves and other shareholders, and therefore potentially greater motivation to beat the tax hike."

The revelation that many businesses have sought to beat the Chancellor's tax increase is likely to frustrate Treasury officials. Although the total value of revenue leakage appears to have been relatively small, the authorities have become increasingly keen to tackle tax avoidance.

The forfeited tax revenue is dwarfed by the additional revenue raised by the one-off 50 per cent tax on bankers' bonuses in the last financial year, which raised close to £2bn.

Capita said that the way in which so many companies brought forward dividends to the first quarter boosted the total value of such pay outs during the first three months of the year. As a result, the total was down by only 2.5 per cent on the same period of last year, the smallest decrease since the UK slipped into recession.

Mr Taylor warned that this should not necessarily be taken as a sign of improving corporate profitability – stripping out the one-off effect of payments brought forward, dividend payments were actually down 7 per cent in the first quarter.

Moreover, the UK's largest comp-anies appear to be performing less well, with the value of dividends paid by FTSE-100 constituents falling 8 per cent during the period. However, said Mr Taylor, companies' overall financial health is improving.