“Employing” your husband, wife or children for the purposes of increasing your business costs and therefore reducing your tax liability has been widely used by businesses.
Whether HMRC will wear it is another matter. Where do you actually stand if the Taxman challenges this decision?
An expense normally has to be “wholly and exclusively for the purpose of the trade”, if not then no tax deduction is allowed. If a tax inspector notices the appearance of such payment, questions will more than likely follow.
Is it a justifiable expense?
You should first establish if the family member actually works for the trade and is not being paid just for the purpose of increasing your business costs. Then assess the level of salary being paid against what they actually do. Does it come under the internal guidance of HMRC “So where there is equal pay for equal value the amount paid is fully allowable, notwithstanding any connection between payer and recipient”
Make sure you keep records as you would with any other employee. For example:
- Contract of employment
- Include them on your payroll and actually make a payment to them
- Follow the starter process as set out by HMRC
- Follow the workplace pension auto-enrolment procedure
What are you paying for?
You should aim to pay the employee the going rate for the work they do. This is of course tricky if they are your only employee or if what they do is a unique role.
Ask your accountant, as they’re likely to have come across this before and could suggest a suitable rate of pay.
If you have to reduce the amount you can claim as a deductible expense because you pay the employee above what is deemed as reasonable, you won’t be able to claim the tax and NI as it is not refundable. Your accountant can tell you the best way to record this expense in your accounts.
Can HMRC legitimately refuse a tax deduction?
Well, no they can’t. If you decide to employ your daughter during the summer break from school to do the filing, arrange the stationery cupboard and meet and greet visitors and you pay them the going rate then they cannot legitimately disallow this as a deduction.
Creating a job in your business is a tax efficient way to give your family extra money without you having to give it out of your taxed income.
If in doubt, contact your accountant, they’re there to guide and advise you.
And if you need assistance setting up a payroll scheme contact us, you can see our service offering HERE.