Paying family members

A recent tax case highlights the need for care when paying family members for work done in the business, says Brearley and Co Tax manager, Andrew Cowe.

“For business owners, employing family members is often a ‘no brainer.  You will naturally have more trust in someone you know and love, they will be keen to play a part in the success of the business, and the wage stays within the family unit.  It all makes perfect sense.

“Of course HM Revenue & Customs (HMRC ) realise this as well; unfortunately they also know only too well that some people will be prepared to pay family members purely as a ‘tax dodge’.  As such, this is an area which they are starting to monitor more closely”.

The key is to staying the right side of the taxman is to ensure that genuine work is being done, and that the wage paid reflects the value of the work.  Continued Cowe, “The recent tax case was a classic example of not doing things right or taking the proper care.  The business owner could show very little evidence of the “work” performed by his son, who was at university, and the “payments” were made in food, drink and paying his insurance, etc., rather than cash reward.  Worse still, the father specifically stated that his son would have to drop out of university were it not for his “wage”.  Unsurprisingly, the tax tribunal found that the payments were more to do with “parental affection” than work duties performed, and hit the business with a tax bill”.

Business owners should nonetheless not be deterred from employing family members, providing things are done properly and evidenced.  Says Cowe “Ask yourself one simple question in these situations: what would I pay an unrelated third party for the job being done?  As long as the rate paid to a family member is broadly commensurate with that amount, there should be nothing to worry about.  As always, the message is to take professional advice if you are in any doubt.”

Andrew Cowe, Tax Manager, Brearley & Co