A recent First-Tier Tribunal (FTT) decision reiterates the importance of keeping sufficient records in order to properly justify an expense deduction when paying a salary to a family member.
In the case of Nicholson v HMRC , the FTT found that self-employed taxpayer Alan Nicholson could not deduct the wages he paid to his son as an expense against his self-employment income.
Mr Nicholson had paid a total of £7,400 to his son at a rate of £10 per hour and 15 hours per week.
The FTT heard that these wages were paid for the “promotion of the business through internet and leaflet distribution and computer work.”
Due to this, Mr Nicholson claimed that, as the wages paid were included wholly and exclusively for the purpose of his trade, the monies should be deductible against his self-employment income.
However, Mr Nicholson had not kept any tangible records to prove that he had paid his son these wages on a regular basis as and when his son undertook work for the company.
In addition, the wages were reportedly paid largely in either cash or in food and drink, as Mr Nicholson had regularly been paying for his son’s weekly food shop while he was living away at university.
Examining the case, the FTT found that there was a “dual purpose” to the payments, on account of the fact that Mr Nicholson was supporting his son in this way.
It added that there was insufficient evidence put forward to prove that there was any real correlation between the number of hours worked and the payments made.
As a result of this, the FTT found that Mr Nicholson could not deduct the wages as an expense against his self-employment income, as the payments did not appear to have been incurred “wholly and exclusively” for business purposes.
Interestingly, however, the FTT said that if Mr Nicholson had “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,” the outcome would have been very different.
The case highlights the vital importance of good record-keeping.
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