For owner-managers of businesses, paying members of their family is an established method of extracting funds and saving tax.
However, in order to avoid challenge by HMRC it needs to be demonstrated that it is paid at a commercial rate for actual work carried out. Furthermore, the amounts paid must be wholly and exclusively for the purposes of the business. What this means is that any work carried out by a family member should be subject to a formal agreement or contract, that proper records of hours, expenses and payments be kept as for any other employee. Wherever possible payments ‘in lieu’ for services, such as computers and other non-cash goods used to satisfy any payment due, should be avoided as these can often be argued to have a dual purpose and may be subject to challenge as to whether they are allowable for tax.
Furthermore, it is often very tempting to reclaim the VAT on such ‘payments in lieu’ and this is perfectly justifiable when the above advice regarding records is followed. But if HMRC challenge the wholly and exclusively test as mentioned above, and rule the expense is disallowable, then there is a double whammy as the VAT will also become irrecoverable. This is because to qualify for a VAT reclaim there must be a clear business motive at the time the expense is incurred. If HMRC refute the business expense, it follows they will refute any VAT reclaim.
It is important that before any such arrangement of rewarding family members through the business, all aspects of the arrangement are carefully reviewed, particularly for unexpected knock-on effects. If you are planning any such arrangements, please get in touch with your normal Haines Watts contact to seek advice before the arrangement is made.
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