Getting at a Tax Deduction for your Family
To deduct or not to deduct, that is the question.
The question of whether an expense is deductible or not can be complex. It is this complexity that tends put business owners off trying to get a deduction for certain expenses. The uncertainty creates fear, the fear that if a mistake is made then the Taxman is going to turn up, disallow the expense, charge penalties and interest, and before you know it you're in a whole lot of financial trouble and in the Taxman's bad books. It's enough to put you off claiming for anything! This is why it is vital for you know what makes an expense a deductible expense for tax purposes and why. That way you can make deductions with confidence. So what does the legislation say about employing family members and therefore getting a tax deduction for your family?
Wholly and exclusively for the purposes of the trade
The basic rule is - Companies can’t claim tax deductions for expenses unless these are incurred “wholly and exclusively for the purpose of the trade”. So where does that leave you with the employment of your family members such as your teenage son or daughter? If you employ them then aren't they getting some sort of advantage from it as well, such as work experience? And if that's the case then aren't they breaking the "wholly and exclusively" rule?
What do the Taxman's Internal Manuals say about getting a tax deduction for your family?
Fortunately BIM47105 clears it up for us - where there is "'equal pay for equal value' the amount paid is fully allowable, notwithstanding any connection between payer and recipient”. So the Taxman doesn't look at the arrangement in terms of the value the employee gets out of it. He's only interested in terms of the value the Company gets out of the employee. And whatever the relationship is between employer and employee doesn't come into it.
So what is value for money?
All you have to do is show that the amount of salary you pay is set at an appropriate level for the type of work being done. That's it! So there’s no reason why you can’t pay your son or daughter to clean the Company Cars; scan the post; make the tea; file the paperwork, bank the cheques, sweep the floors, or train you up on the computer! In fact the list is almost endless.
And what are the Tax Savings?
Let's say you pay your two youngsters pocket money of £80 per month each (£1,920 a year). As a 40% taxpayer this takes £3,310 of your salary (£3,310 less tax at 40% of £1,324 and NI at 2% of £66). If, instead, your company pays them, the cost to you directly will be nil. Plus, because their pay is tax deductible the cost to your company is just £1,536. That’s less than half the cost of pocket money! And in the process your children have gained some valuable experience they can put on their CV and you've managed to put them to good use within your business.
Now that what I call a win, win, win!
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