PAYING A SPOUSE? USE YOUR NOUS!
Many self-employed people will have entries in their accounts for the wages of family members especially their spouse or civil partner. Most claims will be bona fide and justifiable; however in some cases wages are claimed routinely or on an arbitrary basis either below the Lower Earnings Limit (£113 per week) or the Primary Threshold (£157 per week).
The reason for paying up to the Lower Earnings Limit is that there is no requirement to set up a payroll scheme and report wages if the maximum employee pay is at this level. The reason for paying up to the Primary Threshold is that there is no national insurance to pay which makes business sense and administrative simplicity. It is most important to remember, if you are paying a family member, that there is no deduction allowed to the business proprietor for expenses not incurred ‘wholly and exclusively’ for the purposes of the trade.
There have been many disputes between HMRC and taxpayers regarding this issue which has resulted in a number of tax cases. These cases set a precedent that for the deduction of wages to be a valid business expense these conditions need to be met:
Firstly, the amounts must be realistic and not excessive for the work performed. Secondly, the payments must be recorded and PAYE operated appropriately (if required) and, finally, the amounts must be actually paid to the spouse and not be mere accounting entries.
Even if a spouse’s wages satisfy these criteria, in order to claim a trading deduction for the period in question the amount charged in the accounts must be ‘paid’ within nine months of the end of that period.
Many arguments between HMRC and taxpayers regarding this issue have focused on what is deemed to be ‘excessive’. In a recent tax case of McAdam v Revenue and Customs  a self-employed plumber claiming £90 per week for his wife’s wages was considered unreasonably high given the work performed. The taxpayer argued that £90 per week was not excessive for the duties carried out ‘...to maintain the administrative and accounting functions and these duties extend, and are not restricted to, taking telephone enquiries, processing orders and checking part prices’. HMRC accepted that the taxpayer’s wife had done some work but calculated that £8 per hour was a fair rate with no more than 3.23 hours per week seen as reasonable for the work involved, equating to only £1,344 per annum.
The First-tier Tribunal concluded that insufficient evidence had been provided for the wife’s working activities and found in favour of HMRC. So get your house in order and your evidence in place to protect yourself and your finances from the wrath of the taxman!
Jon Hook, the legal expert from Norwich Accountancy Services