Sole trader pays school fees of daughter book-keeper

Sole trader pays school fees of daughter book...

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My client is a sole trader and his daughter has so far done his book-keeping for free. She works elsewhere and is a basic rate taxpayer. The client now wishes to pay the school fees for her grandson in lieu of wages for the daughter and I have suggested that if the contract can be arranged directly between him and the school, the cost should be deductible as a business expense (assuming it is commensurate with the duties performed) but that potentially a benefit in kind will arise, giving rise to income tax and class 1a NI liabilities. However, due to a bursary reduction, the amount of the annual school fees will only be about £6,000. Accordingly as the employee's total reward is less than the £8,500 BIK limit, it seems that no BIK tax or NI will arise. Am I right?

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By Batty Girl
12th Jul 2013 11:44

Not sure this would work

Are you thinking that the fees would be paid under the £55 per week childcare allowance?  If you are two immediate problems spring to mind:

1.  It sounds like these are private school fees - I don't think that the vouchers can be used for school fees.  They could be used for things like after school clubs or boarding fees but not actual school fees.  They are for childcare not education.

2.  This would mean that his daughter is an employee so would need to be paid NMW.

These are just the first two things I thought of, my feeling would be that even if you could overcome these you would need to look at it very carefully as it definately feels like something that would attract a abit of HMRC attention if they discovered it.

Also, if there are any other employees they would need to be offered the same benefit as it has to be offered to all employees to be an eligible scheme.

BG

 

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By Batty Girl
12th Jul 2013 11:52

Replied without thinking!

Sorry, just realised I replied without thinking and you are talking about an employer paying an employees school fees directly and nothing to do with the childcare vouchers.

I think you'll still have an issue with NMW. 

BG

 

 

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By WhichTyler
12th Jul 2013 12:28

PAYE surely?

As before, a benefit is taxable as earnings it ...it consists of the discharge of an employee's debt (see EIM00580)

So this isn't a benefit in kind and is taxable under PAYE, so would have to be grossed up for tax and NI. Hence Q5 on the P35 form, I think ('Have you paid any of an employee's pay to anyone other than the employee, for example, to a school?').

Nice try...

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By John R
12th Jul 2013 12:37

Thanks BG but NMW does not apply to family members as long as they live with the employer.

Thanks WhichTyler but as explained in my original post, the contract would be direct between the school and the client. I appreciate that if this cannot be done, the payment would be the settlement of a pecuniary liability and would then be subject to PAYE.

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Replying to carnmores:
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By Batty Girl
12th Jul 2013 15:02

She still lives with her parents?

That's true John R, to be honest I'd assumed that if she had her own child who's at private school she wouldn't be living with her parents any more.

I think you may have trouble convincing HMRC that the payment of school fees was by way of her employment rather than being provided to her as a family member.

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By WhichTyler
12th Jul 2013 12:52

Taxable on employee?

Doesn't the daughter then have to declare the benefit on her SA return? and so pay tax on it (though this could be generally beneficial if she is still BR and sole trader is HR)?

 

And if I were the school, I'd be wary of 'contracting' with anyone who isn't the child's legal guardian; it's not quite the same as a gym membership!

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By John - Horler Tax
12th Jul 2013 13:09

Not sure I understand the answers!

 

I agree that if the matter is dealt with as originally suggested I agree that no liabilities will arise.  The only downside is if HMRC consider that it is a private rather than a business expense.

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By jdm5454
12th Jul 2013 13:09

If the contract is with the school direct and paid by the company its a benefit in kind its the employee and also subject to Class 1a Nic. Fairly new but becoming popular with owner managed business and private schools.

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By Steve Kesby
12th Jul 2013 13:25

I agree that...

... the direct contracting for the school fees means that payments made are not then money's worth, taxable under S.62 ITEPA 2003. A benefit would arise under part 10, but because the employment is lower paid one, such a benefit is not taxable employment income.

I also agree that NMW doesn't apply by virtue of Reg 2(3) of the 1999 NMW Regulations.

To be a deductible business expense though it must be incurred wholly and exclusively for the purposes of the business. To satisfy that test, the daughter's remuneration package mustn't be excessive and the expense must be incurred wholly and exclusively for the purposes of remunerating her.

It's the latter point that I think HMRC would be most likely to argue. That the expense or at least some part of it would have been incurred by the grandparent anyway, notwithstanding her bookkeeping work.

In this respect you need to consider the "natural love and affection" cases. See BIM37737  and BIM37970.

WhichTyler's latter point is also a salient one. It is frequently the case that schools and childcare providers are often reluctant to contract with employer companies. I'm not sure whether or not it would be the case here though.

EDIT: John and the subsequent response came while I was typing!

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By WhichTyler
12th Jul 2013 13:49

Happy to be put right on the tax situation...

nm

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By John R
12th Jul 2013 15:16

Thanks all.

BG - in fact the daughter and child live with the client but he has just told me that she will be moving out shortly so we will have a NMW problem.

I agree that there may be some problems convincing the Revenue should they challenge the expense under the wholly and exclusively rules and this will be even more difficult if she is also paid the NMW so probably not worth the risk in this client's circumstances.

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