Accruing for maintenance work done by husband

Accruing for maintenance work done by husband

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Strange one this. New client.

Wife (sole trader) runs a successful business and made about 50,000 profit in 15/16. Husband helps with maintenance and general chores but hasn't been paid for any of his work.

Can the wife's business accrue for his work at this late stage in the 14/15 and pay him now and could he put this on his tax return? There is no PAYE scheme in place so he would have to invoice her as a self employed person.

Is this just pushing things beyond the limit? I have advised that I don't think this is possible but just wonder if there are any options at this late stage to get some of the income over to him?

Replies (22)

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By petersaxton
13th Aug 2015 20:12

Why not?

Husband would have to put it on his tax return.

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By arthurallan
13th Aug 2015 22:36

Thanks Peter I am quite surprised to hear that!

So you think it would be OK in  August 2015  for his wife to put say 7,500 of charges through to cover her husbands time and effort doing maintenance work in 14/15? Although the work was done in 14/15. I must confess it doesn't feel right because it is taking her out of higher rate tax;

Just wonder if there are any rules to consider on something like this?

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By Jackie0802
13th Aug 2015 23:01

Doesn't seem right
Is the husband in the business of building maintenance? Suddenly find this large expense after calculation of profit and this sum just happens to avoid higher tax band? Doesn't sound in the least transparently dodgy!

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By johngroganjga
14th Aug 2015 09:23

There is not the slightest problem here provided:

the work was actually done;£7,500 is a fair valuation of that work, and can be justified as such on enquiry;the husband declares the fee as income from self-employment.

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Replying to memyself-eye:
By JCresswellTax
14th Aug 2015 09:36

Agreed

johngroganjga wrote:

There is not the slightest problem here provided:

the work was actually done;£7,500 is a fair valuation of that work, and can be justified as such on enquiry;the husband declares the fee as income from self-employment.

It really is this simple!

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By IslingtonAccountant
14th Aug 2015 09:38

Aren't there employed vs self employed issues here?

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By johngroganjga
14th Aug 2015 09:48

Employed v self employed issues

None worth, in my opinion, losing any sleep over. Certainly not a reason for the OP to refrain from making the accounting adjustment he asks about.

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By Wanderer
14th Aug 2015 09:59

@arthurallan

Don't overlook the fact that it is the husbands income in 2014/2015 & the wife's expense in 2014/2015 (tax year's taxable in & allowable in will be subject to exactly what their year ends are).

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By arthurallan
14th Aug 2015 11:20

Correction Sorry yes the 50,000 was made in 14/15; does this make a difference to helpful responses received? Apologies again. The wife's year end is to April 5th.

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Replying to Paul Crowley:
By petersaxton
14th Aug 2015 12:19

Reality

arthurallan wrote:

Correction Sorry yes the 50,000 was made in 14/15; does this make a difference to helpful responses received? Apologies again. The wife's year end is to April 5th.

Why should that make any difference to reality? You are trying to include all income and expenses for both parties and they should be taxed on their profits.

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By Ken Howard
14th Aug 2015 14:53

Is husband registered as self employed?

Surely an important aspect is whether the husband is already registered self employed as a handyman or tradesman?  If his main source of income is self employed doing similar work, then I see no issue in accruing for the value of work done in both sets of accounts.

However, if he is employed elsewhere or has an unconnected self employment, I'm a lot less comfortable in including it, if he isn't engaged in that trade.  For example, is he using equipment bought for the use of his own self employment, or is he using equipment bought for the joint household (i.e. the usual power tools that most households will own).  If he is using normal household tools, then the wife has probably already paid for them (or her half share if bought using joint monies).  In this case, surely, his "earnings" is more akin to employment rather than self employment?  

And is there much tax/NIC saving anyway?  Yes, wife could save 42% but surely husband will be paying 29% plus class 2 NICs, plus potentially late registration penalties if not already registered?

I think it all hinges on the status of the husband?  Employed or self employed elsewhere and if self employed, the nature of his self employment.  If he isn't genuinely self employed, then too late for it to be put down as employment for that tax year, but nothing to stop it being put down this year if registered for PAYE and supported by RTI submissions etc.

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By sunshine
14th Aug 2015 15:34

He probably isn't really self-employed but an employee, (if no advertising or any other customers etc).

The important thing is, was he genuinely entitled to be paid in those past months, but the payment has just been delayed.

See EIM42260 - tax earnings in the year they are received, being earliest of -

a) when payment is actually made, and

b) when the person becomes entitled to payment

Also, to avoid an RTI issue, no PAYE scheme should have been needed, so the entitlements would all have to be under the LEL limits, no other job etc, (unlikely, but he could be a full time dad etc).

HMRC could argue -

1. Re: timing - the wage was received in the current tax year, and

2. Re: size - a payment of this size requires a PAYE scheme to be set up.

You would have to be able to argue that the payment was for lots of small amounts that the husband was entitled to receive last year - as long as these were the actual facts.

 

 

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By Melody
14th Aug 2015 16:42

Partnership?

The fact that the husband actually did the work surely created an implied obligation to recompense him, as long as there was no explicit/firm agreement that he would not charge. He wouldn't be the first person to invoice late having realised just how much work he had actually done!

He would have to register in good time as self-employed (if not already registered) however.

It would help if they have (or have enough info to recreate) records of the work actually done, so the husband can invoice on a reasonable basis for each job rather than invoices which are an obviously vague guesstimate - if he really has done quite a bit, a reasonable rate could easily add up to about £7,500 in a year. 

Going forward, they might wish to consider bringing the husband into partnership with the wife for future years if not for 2014/15, with the wife as senior partner.

That would give them more freedom to decide how they will apportion the earnings between them, without needing to bother with PAYE and RTI. You would be able to take into account the husband's class 1, 2 and 4 NI (and thresholds) from any other employment or self employment he may have, as well as the wife's taxation, in recommending how they might wish to apportion the income.

They could even register the partnership for 2014/15 - there's still time if they don't delay, particularly if your software will submit partnership returns online. For some reason the HMRC partnership return can't be submitted online, so if you don't have 3rd party software for this you are stuck with the October deadline for paper returns, although you can of course then submit the individuals' returns online. 

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By arthurallan
14th Aug 2015 16:49

Thanks Melody

Would it be possible to bring the husband in as a Partner for 14/15 or could it only be going forward.

The husband is already registered for self assessment because he rents out a couple of properties of his own.

However if I am honest I do think it is a bit "after the event" with the wife realising she has made more than she thought.

On the other hand he does appear to have been very helpful and done a lot of work around the business.

I think its a question of what is reasonable to do retrospectively.

 

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By Melody
14th Aug 2015 17:25

Yes

The husband can be brought in as a partner from 2014/15 - you have to register the partnership before 5th October 2015, and the form asks when the partnership started.

So if you say it began on 6th April 2014 that will not trigger any late filing penalties assuming everything goes in before the deadlines

I'd register the partnership as early as possible to give HMRC more time to get the partnership UTR out to you, but if you've followed their deadlines and they haven't done their part of it in time, it's their fault!

I feel that if the husband really has contributed he should reap an appropriate level of reward - much better than those businesses where a spouse gets given a good salary for doing not very much, or gets promoted way above their competence level while other lesser paid workers carry the can. Also, if he hadn't been so helpful, might the wife have had to pay someone else to do some of that maintenance work anyway?

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By Wanderer
14th Aug 2015 17:30

Partnership?

Sounds like there is some rewriting of history being proposed......................

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By Melody
14th Aug 2015 18:03

Partnership?

Definitely no rewriting of history - honesty is always best and safest.

But sometimes if all the records that are subsequently wanted weren't kept carefully at the time, it's amazing what you you can reconstruct by going through old emails, diaries, bank statements etc, using them to jog  memories, and then, knowing the date to look, often finding more evidence of what was done.

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By johngroganjga
14th Aug 2015 18:11

No the husband can't be brought in as a partner at any time in the past - unless someone has a time machine.

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By arthurallan
15th Aug 2015 18:14

I'm a bit confused now .. sorry.

Melody has suggested a partnership to bring in the husband could be registered any time up until October 2015 for the income/profit for the14/15 tax year whilst John is indicating it cannot be done retrospectively.

Could anyone confirm which would be the correct approach?

If a Partnership couldn't be set up now to cover the 14/15 profits the feedback here suggests the alternative might be the original question which was for the wife to accrue reasonable expenses in her sole trader business for the work her husband did whilst the husband would put his accrued income through his SATR. Then set up a Partnership from now on.

I must admit I feel uncomfortable recommending anything which isn't pretty watertight so wonder what might be the best approach here.

Just need to be guided in the right direction.

Many thanks

Arthur

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By johngroganjga
15th Aug 2015 18:30

The point is that there was no partnership in 2014/2015 to register by 31 October. Melody's suggestion to tell HMRC that it was formed on 6 April 2014 would be a plain lie - wouldn't it?

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By Marion Hayes
15th Aug 2015 22:01

Partnership

John is right - there is no rewriting of history available so unless the property ownership, bank account, instructions to other workmen, acceptance of bookings etc  already are or were done in joint names, which is I think what Melody is alluding to by looking at records, you cannot see any partnership activity.

You say that he already rents out properties of his own so if in reality he took over the management of hers in some aspects I would say you may be able to arrange for her to pay him on a self employed basis.

I will leave to the experts explaining to you when the expense can be accrued or not but would consider extending her accounting period to the date a partnership is formed - including a payment to him in those accounts would have the effect of spreading some of the expense backwards from 2015/16. 

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By Melody
17th Aug 2015 12:37

Partnership

Sorry for late response – my tablet kept deleting everything

I should have said, technically you can register the partnership as starting at any time from 6th April 2014 but not before without incurring late filing penalties, as long as it is registered by 5th October 2015 https://www.gov.uk/set-up-business-partnership/register-partnership-with-hmrc

If the husband was supporting the wife’s business and doing work for it, might there have already been a de facto partnership? That would be for the client to answer. Did he just fix a couple of things on request or did he suggest helpful ideas and carry them out?  Does existing documentation support or deny the possibility of a partnership or is it ambiguous? This may depend on the trade she is in. E.g. were business transactions done by means of formal headed invoices in just the wife's name (partnership invoices and legal documents should have both names). Or mostly by emails and/or cash transactions?  I have known several married couples who use a joint email address even for official communications from just one of them, or who use each other's email addresses interchangeably. 

I make no judgement about whether there could already have been a de facto partnership as I do not know the full facts - those are between you and your client.  History cannot be rewritten and existing documentation certainly cannot be changed, but if there is an existing situation it can be formalised to the extent that the rules allow as above.

A written agreement is not required to set up a partnership unless it is an LLP, although partners may decide it is prudent to have one, or a bank may request one. A partnership can be unequal, and profit can be shared either on a percentage basis or by giving one or more partners a fixed amount plus a percentage of the balance, with adjustments, for instance to avoid mixed profits and losses. HMRC guidance does not seem concerned with the extent to which either partner contributes but rather talks about which business structure suits  https://www.gov.uk/business-legal-structures/overview

Otherwise, as I said previously, your client may wish to consider forming a partnership going forward, with or without a change in the accounting period, while you accrue for the husband’s 2014/15 work. In that case the husband should invoice and actually receive payment, as well as declaring it on his own tax return.

The risk in accruing is that HMRC may deem him as having been employed by his wife rather than self-employed.

If they are able to reconstruct as accurately as possible the schedule of what the husband did and when, then an invoice or invoices which lists specific jobs and dates would probably better support the case for self-employment than just a generalised invoice for x hours worked per month. They’d need to consider some of the general indicators of employment, such as the extent to which he or she had control over what he did and how, when and where, could he (or did he ever) get someone else to help or substitute for him, did he use his own equipment or take on any financial risks etc. The way he words his invoice may help to clarify some of these aspects in case of an enquiry.

Of course, if this couple form a partnership, there would need to be enough trust between the couple that they are both comfortable with the implications particularly (a) each partner is personally liable for any debts of the partnership, and (b) either can act on behalf of the partnership and it is legally binding, unless they make an agreement which restricts one partner’s  authority in certain matters and that agreement is notified to relevant third parties, perhaps as part of their standard terms of trade.

 

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