Tax zone

Newth Talks Tax: Wife as employee

Richard disclosed that he owned one third of a company set up to provide consultancy and training services to clients, in his query of 6 September 2007. He asked whether he would be likely to face a challenge from HMRC if the company were to employ his wife, who is currently a housewife and non-taxpayer. She would be paid under PAYE.

The idea was that the wife would undertake the role of company secretary, which Richard currently undertakes, and she would also be able to type out reports and complete administrative jobs such as dealing with the post and keeping Richard's diary.

From the company's and Richard's perspective this arrangement would make use of the wife's personal allowance and, at the time of writing, the 10% lower tax band (now discontinued). The prospective remuneration payable to the wife would not exceed £10,000. Would HMRC have any issues with this arrangement?

Steve considered that the proposed arrangement was OK. However, matters should be transparent in that the wife should actually be on the payroll, and her net salary after NIC and PAYE should preferably be paid into a bank account in her name. It might also be wise to keep an agreed list of duties on file.

Graham Arnott suggested that, in addition, the wife should have an actual contract of employment. The wife should actually complete work, and not be treated differently from other employees. There should also be a correlation between the wife's work, time and remuneration. The remuneration should be fair and market related. Records of her employment should also be kept such as holidays and sick leave.

Richard replied to say that he would certainly keep a log of his wife's employment and she would have an employment contract. Her salary would go through a PAYE scheme and be paid into her exclusive bank account. Reports would be computer processed, so would it be acceptable to have a diary note of reports completed? Richard would deal with PAYE initially, but once it was up and running, his wife could deal with that as well as VAT recording and returns.

Graham replied further that it was important that the record of reports typed was kept, as well as details of other work that Richard's wife actually competed. In the event of an HMRC enquiry, this would make the case watertight.

I have little to add in this case. The first important principle is that the wife should actually be paid by cheque or bank transfer, and her remuneration should not merely be a book entry. The second principle is that the payment made should be commensurate with the hours worked, responsibility taken and seniority of the post. This seems to be well taken care of in this case. Operation of a PAYE scheme is an added bonus.

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