Are Wages for Family Members Fully Deductible?
A high-profile case (McAdam v Revenue and Customs 2017) hit the headlines recently, with HMRC winning a First Tier tax tribunal in relation to the wages paid to the wife of a self-employed plumbing and heating engineer.
In this particular case, Mr McAdam was paying his wife £90 per week for duties including answering the phone, checking prices for parts and processing orders. The wages were deemed excessive by the tribunal, with HMRC suggesting an appropriate wage would be £1,344 per annum – calculated as 3.5 hours a week for 48 weeks, at an hourly rate of £8.
The judge agreed with HMRC that the amount allowed as a deduction should be limited based on the hours spent and appropriate rate for the work done.
While the general principle is that the expense must be wholly and exclusively for the purpose of the trade, the recent increases in the personal allowance mean it’s imperative that wages paid to a spouse or family member can be justified.
Crucially, the wages received must be for work that is actually done, and it is also worth considering the amount it would cost to employ someone else to do that specific job. As evidenced in the McAdam v Revenue and Customs (2017) case, HMRC will query the wages if they are considered to be unreasonable and take necessary action.
In the case of Mr McAdam, there was very little evidence of his wife’s participation in the activities he stated, which ultimately made the outcome of the tribunal relatively straight-forward. This reiterates the importance of keeping records of the spouses’ or family members’ working activities and ensuring there is credible evidence should the wages be questioned.
Written By: Jack Biggs, Accounts Assistant