The Tax Implications Of Employing Family Members
Make sure you have documentation ...
POSTED BY HELEN BEAUMONT ON 01/06/2018 @ 8:00AM
I recently reviewed a tax case to do with employing family members and thought I would blog about it. The case was about a parent paying their children through the business ...
If you're employing family members, make sure that the work they do for you is documented!
copyright: maximkostenko / 123rf stock photo (licensee)
At a tribunal, the case was about a fatSo there's no suggestion that parents her paying his student son for work claimed to have been done on behalf of the business. HMRC disallowed it as they stated the expenditure was not "wholly and exclusively for the purposes of the trade" and so HMRC demanded tax would be payable on the amount the father paid his son.
The father said that his son had been employed in "the promotion of the business through internet and computer work". The son had been paid £10 per hour for 15 hours of work per week, but the father had no evidence to support the payments actually being work-related.
"HMRC rejected the claim as there were no records to reconcile with the business bank statements!"
The father claimed his son had been paid for the provision of services and identified £1,850 in cash payments and a monthly direct debit of £18.51 for his son's home insurance. HMRC claimed the bulk of the payments were to help the son buy food and drink whilst at his university.
The appeal against HMRC's claim was rejected by the tribunal because the payments were of a personal nature and were given via natural parental love and affection rather than for services rendered and were not in support of the father's trade.
This has interesting implications for parents wanting to pay their children and claim it back via their business. If your child will be looking after your website, or marketing online, or even wrapping products ready for dispatch, you have to have paperwork to prove that's what's actually happened.
It's not good enough to just say that's what they did, you have to prove it!
Keep records of the work they have done for you. The tribunal had said that the father's appeal would have been more likely to succeed if there was a time card or some other form of documentation to prove the son had done the work.
The payments from the father were also random amounts, spread out over the month. If there had been one payment per month from the father's bank account and a matching invoice from the son then this could have gone a long way to support the appeal. A written agreement between the two would also have helped.
So there's no suggestion that parents can't employ children, but it's about making sure the relationship is a commercial one and that you can prove that the work has been done and at a fair price. And remember, when paying your children, legal issues like the national minimum wage and the working time directive need to be considered.
If you take money out of the business to pay your children, be prepared for HMRC to consider it either pocket money or a gift, so you'd better be sure your documentation is in order or else you won't be able to claim a tax deduction.
"Would you like to know more?"
If you'd like to find out more about employing family members and how to handle the tax efficiently then do give me a call on 01908 774323 or click here to ping me an email and let's see how I can help you.
Until next time ...
If you're looking to work with an expert tax advisor with a wide range of tax experience, do visit www.essendontax.co.uk to find out more about me and discover how I can help!
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen’s specialist knowledge in tax planning and experience ensures every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.