The Accounts for many self employed individuals contain deductions for family members especially a “spouse”.
But what does the taxman make of these deductions?
Most claims for these deductions are valid and can be justified providing that:
- The amounts paid are realistic for the work done.
- Payments are recorded in the business records.
- PAYE scheme is operated where necessary.
- Amounts are actually paid to the individual.
The main issue here is whether the amounts paid are realistic and not excessive.
In a recent case (McAdam vs HMRC) a self employed plumber argued that a wage of £90 per week to his wife was reasonable.
After all she kept accounting records, answered the phone, placed orders with suppliers etc.
On the face of it that looks quite reasonable however…
HMRC calculated that a reasonable wage would be about £26 per week (at £8 per hour).
The Taxpayers appeal was dismissed.
If HMRC consider that the amount paid is excessive then there is the possibility of “double taxation”
The Employer would only be allowed to claim a proportion of the amount and so the “excess” amount is taxable.
The amount paid remains fully taxable on the recipient.
Apart from the criteria mentioned above, it is advisable to have evidence of the work done and time spent. The rate of pay should be in line with the nature of the work