EDP Norfolk - - Last Word In Property -

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 [2017] 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 ‘ 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

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