The rules on tax-deductible expenses for the self-employed, state that any costs must be incurred ‘wholly and exclusively’ for the purpose of the business. When paying family members, to qualify for tax relief there must be no indication that the money was paid for a dual purpose. A recent tax tribunal case illustrates how easy it is to make an error, and we explain how to get it right.
Mr Nicholson wanted to claim tax relief on wages paid to his student son from his business. Over the course of several years, his son helped with computing and, whilst away at university, also helped to promote the business via the internet and with leaflet distribution. Mr Nicholson explained that, ‘Without his help I could not do my job as a central heating salesman and the internet business I was trying to build.’
Mr Nicholson went to tribunal over payment of wages totalling £7,400. In his defence, he argued that he had paid his son less than the commercial rate for similar work. If he had employed someone else to carry out the work, the costs incurred by the business would have been ‘an awful lot more.’
The figure of £7,400 was based on 15 hours work per week at £10 an hour.
The issue arose because there was no evidence that the wages had been paid in this way. In reality, Mr Nicholson sometimes gave his son cash. On other occasions, he used his own credit card to pay for food and drink when visiting him, and to fund the weekly student grocery shop. There were no time records of the hours worked.
Based on these facts, the tribunal found that the expenses had a dual purpose. Although there was a business element, there was also a private element; they were made to support a son at university. Mr Nicholson lost his appeal.
Paying family members – some good advice
When you pay family members to carry out work for your business, keep a record of hours worked. Make sure you can demonstrate how payments made relate to actual work done.
The tax tribunal was interested in seeing ‘some form of methodology in calculating the amount payable and an accurate record maintained of the number of hours his son worked.’ Had Mr Nicholson been able to show evidence of this there would have been no need to question the legitimacy of the expenses – and no need to appear before a tax tribunal.
Bookkeeping and annual accounts
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