HMRC has just updated it’s tax advice for family businesses employing offspring.
Gloucestershire’s ESB Accountancy summarises the HMRC tax advise for paying family members is that payments needs to be systematic, recorded, and contemporaneous.
Formality is the best approach – think about payment by bank transfer so figures tie in exactly, use payslips and record work done and when thus creating an unambiguous audit trail in place.
What family businesses don’t want to do is what Mr Nicholson did. Payment was made in cash and in kind. He paid for his son’s university grocery shop, provided food when visiting, paid for home insurance and gave cash. He blurred the boundaries. It’s something clients can do all too frequently, and it won’t seem wrong until it all goes wrong. Use this case to make thepoint.
In his conclusion, the tribunal judge commented:
‘Had the business owner paid his son on a more time-recorded basis or had there been some form of methodology in calculating the amount payable and an accurate record maintained of the number of hours his son worked, then as with any family member on the payroll of a business, it is unlikely that the expense would have not satisfied the provisions of s 34TMA.’
The takeaway message from the Nicholson case is this: the claim need not have failed, but it did require a tightening up of procedure to pass HMRC’s tax rules.
Family Business Tax Legislation
The relevant legislation is ITTOIA 2005, s. 34 for unincorporated businesses and CTA 2009, s. 54 for companies.
Section 34(1) of ITTOIA 2005 provides:
‘In calculating the profits of a trade, no deduction is allowed for–
(a) expenses not incurred wholly and exclusively for the purposes of the trade,or
(b) lossesnotconnectedwithorarisingoutofthetrade.’And s.34(2):
‘If an expense is incurred for more than one purpose, this section does not prohibit a deduction for any identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purposes of the trade.’
Mr Nicolson’s claim failed because the payments he made were dual purpose: to reward his son for work done and to support him at university. Mr Nicholson ‘expanded on his grounds of appeal’ at the tribunal hearing. This really wasn’t a good idea. It was tantamount to reading a script entitled ‘duality of purpose’. He explained how ‘as a father he had a vested interest in his son’s progress in life and wanted to make sure that he was giving him the best chance to succeed in his education…without the wages his son would not have been able to maintain his university studies.’
On the other hand, had he – subject to the proviso about methodology above–simply made payments to his son for work done in the business, and let the son use the money as he chose ,that would have been quite legitimate.
If remuneration is not at an arm’s-length commercial rate, HMRC will expect apportionment between the wholly for business purpose part – assumed to be a commercial rate for the job – and the gratuitous element, due to family relationship, which is disallowed.
Family businesses tax advise conclusion
Paying family wages is an effective and permissible way of supporting family members and maximising tax relief in owner-managed businesses. But plans can come badly adrift unless arrangements are properly documented and adhered to.
Please talk to us at ESB Accountancy to discuss making the most of your family business tax rates – with several decades of financial experience here in Gloucestershire you can either ring us now on – email us on firstname.lastname@example.org or click the Contact Us buttonor please fill the form at the bottom of the contact us page.