Do you pay your husband or wife a wage from your business? Is this because they genuinely work for you or because your accountant or tax adviser suggested this might be a useful way of saving some tax?
Many small business owners employ a member of their family to undertake small administrative tasks, assist them with record keeping, collect and deliver supplies, deal with banking and a whole host of other similar ad-hoc business management functions, thus leaving the main breadwinner to get on with the day to day work of the business, providing services, or dealing with customers and actually doing the job.
This sort of “planning” has a been a long standing feature of the financial affairs of many small businesses and is of perfectly legitimate so long as the person employed is actually doing some work, their pay is actually paid to them and is clearly commensurate with the work they do. Or to put it another way HMRC might find it objectionable if their salary/wages look excessive and can be viewed as just a way of getting a deduction against profits for wages that are not going to be taxable because they will be covered by the recipient’s personable tax allowance.
There have been a small number of tax tribunal and court cases on this over the years and these generally highlighted the point that such wages will only be allowable as a deduction against profits so long as they are indeed paid by the business “wholly and exclusively” for the purpose of the trade profession or vacation and are not paid out of some personable motive or purpose, ie they are not just paid out in order to gain a tax benefit by using the recipient’s personal tax allowances.
Now in recent years it is perhaps true to say that this topic has not exactly been one which has seen a lot of activity from HMRC and the number of occasions on which it seems to have attracted their attention has diminished over the years, either because business proprietors and their advisers have perhaps become more cautions or, more likely in my own view, because HMRC has found other more profitable fish to fry. However, this may change soon.
The Chancellor proudly announced earlier this year that the personal income tax allowances is to rise to £10,000 per annum from next April, (one year earlier than originally planned). At nearly £200 per week it occurs to me that all a sudden her Majesties’ Inspectors of Taxes might decide that this is now worth another look. The business man or woman who has been paying their spouse at or about the modest personal allowances level for many years and increasing it to that level annually in line with annual rise in the allowance might like to pause and consider next year, before increasing it to this new high, whether in fact this level of salary a can indeed still be justified? I am wondering if perhaps we might begin to see a renaissance of this sort of challenge to the smallest of businesses in the years to come given that the allowance has gone to five figures for the first time ever? Just a thought?
Russell Cockburn is the author of Small Business Tax Planning.