One of our clients wanted to put his teenage son on the company payroll to help him with his finances, but was worried what HMRC would say about this. Can his company claim a tax deduction for his son’s wages?
We’ve heard it a thousand times in a hundred different ways, “I’ll get the company to pay so it can claim a tax deduction”. Using the company cheque book to pay a non-business expense won’t make it tax deductible. On the other hand, don’t write the idea off completely. Meeting a cost that benefits you in some way doesn’t automatically rule a tax deduction.
The wholly and exclusively rule
Companies can’t claim tax deductions for expenses unless they are incurred “wholly and exclusively for the purpose of the trade”. It’s often thought that this rule can lead to trouble where you pay a member of your family. For example, you might employ your son or daughter just to give them work experience they can put on their CV or to give them some cash in their pocket. Clearly there’s an advantage for you and them, but does this break the wholly and exclusively rule?
Relationships don’t matter
To answer the question above you don’t need to look at what you or your youngsters get out of the arrangement, but what your company gets out of the deal. HMRC’s internal guidance manual (BIM47105) explains it this way: “So where there is equal pay for equal value the amount paid is fully allowable, notwithstanding any connection between payer and recipient.”
Value for money
So thinking about our client’s situation he needn’t worry about employing his son through the business; his company will be entitled to a tax deduction for his son’s wages, as long as the amount of salary is at an appropriate level for the work done.
Create a job
There’s no reason you can’t pay your son or daughter to sweep the company car park, clean its vehicles or even help with the IT. With some creative thinking we’re sure you could find 101 tasks.
Extra tax savings
If your company pays your children, you’ll have to find less out of your own pocket to support them. This can make a difference: where you pay them the money will originate from salary or other income on which you’ve paid tax and NI, but where your company pays them, these deductions won’t apply.
To discuss in more detail call Ewan on 01698 440330.