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Wifes wages

We have inherited a case where the client has an Aspect enquiry. All bar one point has been agreed but the problem is wifes wages. HM R&C say that because the amount has not been recorded in the cash book we can't prove that it has been paid.

Its a husband and wife under his name as a sole trader but she man's the phones and writes up the books, HM R&C have accepted that she does this work.

However they are still disallowing the expense as we can't prove its been paid, and won't budge, our final option is to go to the commissioners. Which given their unreasonable stance we feel we have no choice. The amount is only £2,600 a year and actually very representative for the work involved. We have argued the amount has been paid from cash drawings but HMRC says we cannot prove this.

Has anyone come across this before and can anyone offer any insight into the best methods to attack HM R&C's case?

Any help will be much appreciated
Thank you
Matthew Thomas

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Wifes wages I Rev agreed at £3,500
I had a similar problem on a client. The client actually recorded his wifes pay on his computer but the transfer to their personal joint account was one amount. I managed to get the inspector to up from his position of £520 pa (What a Joke!) to £3,500 pa by through everything at him. ie Minimum wage rate, copies of all the typing she did for her husband,listing all the time she spent on each activity etc. I also even mentioned that womans realm might like to hear that a wife is only worth £520 pa if she assists her husband. I couldn't go for the amount I claimed in the accounts (£4,700) as I had no proof she personally got the money, as someone else has stated. The client was pleased with what I had achieved and by the sounds of things it was a result.

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Hiding to nothing
For years now, Revenue view has been that they will allow spouse's wages only to the extent that they are reasonable for the services provided and that payment was actually made. The payment condition is laughable because of course there is nothing to prevent the wife handing the money back to the husband (though I guess Revenue may attack that if seen as blatant abuse). Nevertheless, because this has been the approach for some time now, I would be very doubtful of success in front of the Commissioners - is the potential (unlikely) tax saving worth it? I think the answer is to bite the bullet and ensure your client gets it right in the future.

Having said all of the above, you may want to direct the Inspector to EM3911. Although not explicit, this paragraph does suggest that Inspectors are able to allow the deduction where they are satisfied that the expense meets the usual DI criteria (and are satisfied that it was physically paid during the period). In particular, I would ask the Inspector to demonstrate why he is not satisfied that the wife did in fact render services commensurate with the wages claimed.

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Paid
Isn't a loan creditor in the accounts sufficient proof of payment if no money has changed hands?

If not, ask the inspector why, if he is certain that the wife is working but not allowing a payment, he isn't enforcing the National Minimum Wage as he is required to do so.

If there is work to a non-partner, then there must be a payment for it. The law requires it.

NeilW

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Paid?
Neil's words seem, at first sight, to conradict each other - how can wages have been paid if no money has changed hands? (A deduction for family wages can be made only when payment is actually made). Does crediting to a creditor account (and accounting for any PAYE/NI that may be due at that time) constitute payment of wages? I know it does where director's loan accounts are concerned, but a sole trader?

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Go to the Commissioners
The key to this is - were the wages paid. If they were then you have no problem.

The final arbitors of fact are the GCs. If HMRC will not believe your client when he states that the wages were paid cash from cash drawings then tell him to issue a determination against which you will appeal direct to the Clerk to the GCs requesting a personal hearing asap.

The case will then be reviewed by the Line Manager at HMRC and, if it gets that far, by the Appeals Inspector. It is far more likely that the Inpector you are dealing with will then settle - probably with very bad grace!

Be prepared to go to the GCs on a pro bono basis. It will be excellent experience. Unfortunately, HMRC often seem to gamble on the fact that your client will not pay your fees for going to the GCs, especially on small sums. Telling HMRC that you will be acting on a pro bono basis takes the wind out of their sails on that one.

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The question is slightly different from that which people are ad
The question has to be whether there was a contract, and whether the amounts paid[through cash drawings] repesented the sums due under that contract.

Minimum wage, for example, only applies it there was employment.

Could the wife tell you the terms of her employment-hours, pay rates, holiday entitlement etc.?

Does she even know she is paid?

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wife signs receipt
I had a similar problem, HMRC were aware all the work that was done, at a reasonable rate - they dropped their stance when I asked if they wanted a signed statement from the wife stating she had received the wages - with the added comments of producing this at the commissioners.

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wifes wages
This is not a new area of dispute and I remember it was part of the first investigation with which I was involved thirty years ago. HMRC are rightly sceptical about claims for deductions for payments to wives for obvious reasons. It is normal procedure when there is an investigation to be able to back up claims for deductions like sending HMRC supporting invoices. You also need to pass the wholly and exclusively test, so you need to be able to show that even where a payment has been physically made that it is commercial and what would have been paid to an outside third party for doing the same work. I agree with the other comments mentioning loan creditors but HMRC have always said that they require to see proof of payment. What is the problem with that? You could set up a standing order or if payment is by cash out of the till, have a book that the wife signs when she receives the money. Re a loan creditor if a cheque is issued in settlement, I should expect that to be sufficient, but remember there is legislation which prohibits a deduction for a particular accounting period when wages are paid many months late.

I hope the above is helpful.

David

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Missing point
Everyone seems to be shying away from the real problem which is that any employee's wages will be disallowed if not paid within 9 months of the end of the AP in question, and if paid late will only be allowed in the AP in which payment takes place.

The suggestion that wife signs an affidavit swearing that receipt has been made in cash should suffice, perhaps with the added suggestions about taking it straight to the commissioners etc but... let it be an object lesson - how many other clients do you have where wives' wages are not actually being paid? Its a trivial point but one where the revenue could succeed in most investigation cases of small self-employed clients.

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evidence of duties is all that is required
Payroll records might evidence the existence of a wage but typically, no formal payroll records are kept because the wage is below the tax and National Insurance threshold.

A record of wife's wages is recorded in the annual accounts and accountant's workings. This should be sufficient for a deduction as long as the duties can be explained to support the amount paid.

At BIM37735, in reference to Moschi v Kelly [1952] 33TC442, it states “whether the sums have actually been paid or not to the person entitled to the salary does not determine the question whether the payer is entitled to deduct them in his business accounts”.

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