Paying Family Members from the Company. Dos and Don`ts.
Let’ s checks out wages payments by the self-employed to their children, and whether insurance claims for a tax deduction are permitted.
It is not unusual for the self-employed to get a family member (e.g., Son or Daughter at college and making spending money at weekend breaks) to help in the business occasionally.
Just how much can the Mums and dads reasonably pay?
To be an allowed business expense in such conditions, wages payments to the family member need to be ‘completely and solely’ sustained for the objectives of the trade (NB. an identical guideline relates to companies, however this short article concentrates on unincorporated businesses).
Don't overdo it!
HM Revenue and Customs (HMRC) will certainly sometimes check out the degree of payments to the family member and seek to establish whether the payee was paid significant market rates. HMRC’s support (in its Business Income Manual at BIM37715) shows that whether wages to the family member are ‘excessive’ (and consequently not a tax-deductible expense for business owner) will be determined on the particular realities. Nonetheless, HMRC instructs its advisors: ‘You must accept a reduction for reimbursement that equals with the obligations carried out and at the price payable on an arm’s length basis by similar companies.’
What's the function?
If the wages payments (to business owner’s college student offspring, in the above instance) are considered excessive, HMRC could (if there is no clear connection between the payments and the work carried out) argue that the entire amount needs to be refused. Nonetheless, if there is duality of objectives, a deduction is not restricted for any identifiable proportion of the expense which is incurred completely and specifically for the functions of the profession (ITTOIA 2005, s 34( 2 )). In such cases, just the excess over a typical business price must be disallowed, on the basis that there is a ‘non-trade objectives’ for paying the extra (see BIM37707), such as out of adult love and affection.
Cases where an investor’s wages payments to offspring were thought about to be too much consist of:
Nicholson v Revenue and Customs [2018] UKFTT 14 (TC)– Wages payments to a self-employed individual’s boy (an university student) were wholly prohibited. The First-tier Tribunal (FTT) held that the payments had a double function and were not incurred entirely and exclusively for the purposes of the taxpayer’s trade. They were not directly and solely referable to the profession. There was no straight connection (arithmetically or otherwise) in between the quantity of work his son did and the payments he received; the taxpayer was assisting to sustain his son whilst at college.
Johnson (t/a Johnson Bros & Co) v CIR [1919] 12 TC 147– Increased payments by a trader (i.e., in terms of a share in the profits of business) to his three grown-up children were held to be extreme and were therefore partially prohibited for tax objectives.
Scott & Ingham v Trehearne [1924] 9 TC 69– Commission payments to an investor’s 2 kids (at a rate of 33.33%) were not considered to be on a commercial basis, and only 10% was deductible.
Practical tip
Self-employed individuals paying wages to a family member ought to do so with care. The tribunal in Nicholson commented that had the taxpayer paid his offspring on a more time-recorded basis or had actually there been some kind of methodology in computing the amount payable and an accurate record kept of the variety of hours his child functioned, it was unlikely that the expense would have been forbidden.
Article Written by Martin J Craighan
Director of Salford Tax Specialists Ltd
31.01.2025.
All rights reserved.
