Compliance Check Help!

Client is subject to a review and they intend to disallow a sum of wages/subcontractor fees

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Good afternoon all,

Firstly I know this isn't going to go down well with a lot of people on here but I am genuinely losing sleep over this and would appreciate any advice or guidance that can be given.

I have a client that has been picked for a compliance check and overall it has gone reasonably smoothly however we have now arrived at the conclusion which is only going to perpetuate my lack of sleep.  Quick summary, wife's business which is run from a small semi-detached home, stock is literally everywhere throughout the house, upstairs and downstairs and outside in the garage.  Husband has retired and understandably has to help wife given they are living amongst her business everyday.  Given that situation, wife gives him a wage from the bank account she uses for the business. However the problem starts here as it just gets transferred across into their joint account as a lump sum with her drawings and husband spends it from there, no physical payments tie up to the amounts advised on the tax return.  I.E.  Wages for month may be 3k for him so she'll transfer 5k for him and her in one go.

With that in mind, whilst the compliance officer advises that he doesn't doubt that the husband assists in the business given high volume of transactions it would be unreasonable to expect wife to carry out the role on her own, he disallows ALL wages for the year in question AND historical years because he can't see any evidence of the expense being made.  I completely understand this conclusion but during the review I did advise him that it's almost run as a partnership (without being under that umbrella) because their finances are shared and linked given their marriage and length of time being together so they don't see the necessity to split out any figures because it just goes from one bank account to another.

Can anyone offer any help with this?  They are not wealthy clients, they just run a business that gives them a good retirement income in absence of any private pensions.  Wife is of retirement age too but enjoys doing what she's doing.

Replies (135)

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By Bobbo
25th Jun 2024 13:34

Is there any contemporaneous record of the amounts that were transferred to the joint account in respect of the husband's "wage" and how much were her drawings?

Or is it a case of transferring lump sum amounts and deciding the split later? ... possibly around the time tax returns are being prepared?

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Replying to Bobbo:
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By Ozzi
25th Jun 2024 13:41

Transfers are made throughout the year, which include the amounts advised on the tax return but also include wife's drawings too.

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Replying to Ozzi:
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By Bobbo
25th Jun 2024 14:34

Doesn't answer the question.

When, to use your example, 5k is transferred from business account to the joint account in respect of a certain month, what record is there that the 5k represents 3k 'wage' to the him and 2k of her drawings?

Entry in an accounting system?
Entry in a spreadsheet?
Email from her to him?
Post it note?
Anything?

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Replying to Bobbo:
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By Paul Crowley
25th Jun 2024 14:35

I suspect that HMRC consider that to be the case.

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Replying to Paul Crowley:
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By Ozzi
25th Jun 2024 16:28

That is the case, if it was a third party obviously the records would be held differently and I accept that isn't correct but that's not to say work hasn't been undertaken.

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Replying to Ozzi:
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By Paul Crowley
25th Jun 2024 17:16

Client's problem is that she needs to demonstrate the reality of the transactions.
They probably look like tax engineering.

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By David Ex
25th Jun 2024 13:35

“Wages for month may be 3k for him” so presumably there’s a payroll set up and appropriate reports and deductions made?

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Replying to David Ex:
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By Ozzi
25th Jun 2024 13:42

Wages aren't run through payroll scheme but are all declared on husband's SATR with tax and NI paid on it too.

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Replying to Ozzi:
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By David Ex
25th Jun 2024 14:06

Ozzi wrote:

Wages aren't run through payroll scheme but are all declared on husband's SATR with tax and NI paid on it too.

Operating PAYE isn’t optional and it certainly doesn’t look like self-employment.

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Replying to David Ex:
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By KD1182
25th Jun 2024 19:50

It is actually optional, earnings less than the lower earnings limit do not need a PAYE scheme to be run, but simply the requirement is to maintain “payroll records”.

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Replying to KD1182:
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By FactChecker
25th Jun 2024 21:35

Missing the point of David's ...
"Operating PAYE isn’t optional and it certainly doesn’t look like self-employment".

If it's not self-employment (with which I concur from what we've been told) and there's no mention of H having a company invoicing for his services, then it's employment and wages.
Rule 1 for an Employer is to 'operate PAYE' (which includes abiding by the regs);
Rule 2 is that a PAYE scheme (and RTI) may not be required depending on certain criteria - (which seem very likely to have been exceeded in this case).

So, as you appear to enjoy being pedantic, Operating PAYE isn’t optional (if you're an employer) - although this may not lead to the need for a PAYE scheme or RTI!

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Replying to Ozzi:
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By Paul Crowley
25th Jun 2024 14:37

THAT IS THE PROBLEM
Not proper wages at all being operated on a monthly basis.
Wait until the year end and look for the best tax advantage.
Why did you let that go on for so long?

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Replying to Ozzi:
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By Paul Crowley
25th Jun 2024 17:17

They are not wages. Wages are for employment under PAYE

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By Roland195
25th Jun 2024 13:38

Am I right to assume that this is a compliance review into the Self Assessment Return of the wife?

Are the £3k wages being run through a PAYE scheme?

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Replying to Roland195:
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By Ozzi
25th Jun 2024 13:42

Roland yes correct review of wife's return. Wages aren't run through payroll scheme but are all declared on his SATR with tax and NI paid on it too.

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Replying to Ozzi:
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By Roland195
25th Jun 2024 13:47

So they aren't wages at all but some sort of subcontractor fee? Is there any reason why it wasn't just set up as a partnership properly?

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Replying to Roland195:
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By Ozzi
25th Jun 2024 13:52

Yes to subcontractor fee. Wife had come to me as SA and husband retired the same year so he just pitched in as and when. Then business grew year on year and his involvement got more because he had more free time but wife sells on Amazon and is very weary of her selling channel being turned off if she had to change trading status so was reluctant.

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Replying to Ozzi:
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By Roland195
25th Jun 2024 14:13

Would the wife be a higher rate taxpayer without her inventive profit sharing scheme by any chance?

I would be wary here of doing too good a job convincing HMRC regarding these "wages" lest they decide a status enquiry is in order.

You could also consider what the position on the husband currently is -if the wife hasn't paid him fees then what has he returned on his own SA returns (not as simple as that though).

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Replying to Roland195:
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By Ozzi
25th Jun 2024 15:44

By status enquiry do you mean employee status? If that's the case HMRC would then be accepting that wages are there somewhere in the midst of payments and therefore PAYE and NI would be payable rather than SA tax (which is what is currently being paid) which is acceptable to us. HMRC are instead deciding that no wage is allowable despite the concession that the work couldn't be done by one person alone.

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Replying to Ozzi:
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By Roland195
25th Jun 2024 16:08

It's not necessarily that simple. It's possible that HMRC could conclude PAYE and NI should be operated on payments, apply penalties that may or may not be relieved by SA tax paid and that full relief isn't due in full on the payments by the wife.

Struggling to see on what basis a genuine self employment can exist for the husband in the the circumstances described particularly as you appear to have absolutely nothing to back it up - invoices, timesheets, business bank account.

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By pauld
25th Jun 2024 13:46

unfortunately I would struggle to see what you can do. If business is in sole trade name of wife, then there is no partnership as you would be doing partnership tax returns. With regard to wage to husband, if no PAYE scheme in place then how can you say its wages especially for payments as high as £3K. As you will be aware, there is an amount that can be paid without the need for a PAYE scheme i.e. £123/week, £6,396 per year (assuming no other employees) and so you could potentially argue for that amount/ or part of it but if payments to joint account have not been separated, then it just looks like personal drawings for the wife and I am not really sure how you could argue otherwise. Is this not something that has been discussed with your client previously i.e. for the need to do things properly, or have you just been putting amounts through as husbands wage as it seemed a good idea in order to reduce their tax? If HMRC are happy that husband helps in business, then perhaps you can try and agree a reasonable deduction for 'wages'?

I've just noticed that husband is declaring the income on his return, so everything is being declared so that must stand in your favour. I guess its just the loss of tax, which must be fairly small, but which HMRC are trying to claw back. In this case, i would tell HMRC to go and do one......................

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Replying to pauld:
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By Ozzi
25th Jun 2024 14:02

Yes it's not necessarily wages it's just an amount that he earns for when he helps her. Their house is absolutely full of stock, I think it's unreasonable to think that the husband is her helping her for free supporting his wife. It's contributing to both of their retirements. I have never had a compliance check before so I don't know whether that's something that would be taken into account to arrive at an alternative result.

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Replying to Ozzi:
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By pauld
25th Jun 2024 14:05

you need to argue your case i.e. husband helping out a lot and declaring income on his own tax return. The only issue is quantifying that income as will not match any specific payments. How much are you declaring on husbands return and how much tax is at stake?

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Replying to pauld:
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By Ozzi
25th Jun 2024 14:16

The amount varies as it's dictated to how many orders wife receives. The higher the orders, the more legwork husband has to do. As they have disallowed the fees in one year however they are now going back to disallow historical years too.

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Replying to pauld:
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By FactChecker
25th Jun 2024 15:47

"In this case, i would tell HMRC to go and do one......................"
... you are kidding I hope?

Taking the pi$$ out of HMRC is all very well when they're the ones who've fecked up ... but 'poking the bear' is very unwise where it sounds like client has made serious errors (and probably for years).
However 'mean', HMRC would be perfectly justified (based on what we've been told here) on raising a LOT of penalties simply due to not setting-up and running a PAYE scheme (and all the failures that flow on from there).

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By gogzyb
25th Jun 2024 14:03

The HMRC Manual at BIM66220 should help:

"Factors which may be relevant in considering a case where payment is made to a spouse or civil partner or other relative include:

•whether the subcontractor owns or rents business premises separate from the family home

•where the spouse, civil partner or relative carries out their duties

•the nature of the duties performed, and

•the amount of the payment

Where a deduction is claimed for payment at the commercial rate in respect of substantial duties performed at premises away from the family home, it is likely that the deduction is allowable.

Conversely, where payment at a non-commercial rate is made in respect of minor services performed at the family home, a deduction is unlikely to be justified."

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Replying to gogzyb:
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By Ozzi
25th Jun 2024 14:15

Gogzyb thank you for your helpful response.

Our argument is it isn't a minor role, yes the stock is held there but it is sourced from around the town, catalogued at home (we're talking 1000's of items which need to be organised to be found) and despatched to sell online.

If HMRC argue it's a non commercial rate then that's a starting point but to argue to disallow the whole figure seems to be too far one way, especially when the officer advises he accepts that work is undertaken by the husband.

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Replying to Ozzi:
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By FactChecker
26th Jun 2024 15:34

".. to disallow the whole figure seems to be too far one way, especially when the officer advises he accepts that work is undertaken by the husband"

... for the nth time (and as mentioned several times by TD and others), the 'threat' to disallow the figures is unlikely to have been based on whether or not 'any work was done'. The issue is the nature of the payment (as in what was it?) and the lack of evidence of that (PAYE or S-E invoice or ...)

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By Paul Crowley
25th Jun 2024 14:32

Did the wages go through the HMRC Wages system?
If so then be prepared to go to first tier tribunal
For the avoidance of doubt I ALWAYS advise clients to pay the wages correctly. This is a common theme from HMRC.
Be prepared for both parties to swear an affidavit that the wages have been paid by transfers to the other account. Send it to HMRC.
I would not be concerned about this, because client would have had conversations every year with me getting more and more annoyed as to why she cannot follow my very direct and blunt advice that this will be a risk if she ever gets an enquiry.
Even then I would expect to succeed, but at the client's cost for keeping inadequate records.

EDIT
It is not wages.
Husband has a trade of 'helping the wife'
Far less confident, but the affidavit is valuable evidence that the HMRC must look at.
It would only say that the 'payments' happened, not that they are a valid deduction for tax.
Seriously do not let stuff like this slide.
I would have set this up as wages, not a subcontract item.

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Replying to Paul Crowley:
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By Ozzi
25th Jun 2024 15:03

Hi Paul, thanks for your multiple comments and advice. Generally, I advise the same thing, I have H&W payrolls setup doing exactly this but in this instance it didn't happen as I didn't see this becoming an issue with us disclosing the income through SA on his record anyway.

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Replying to Ozzi:
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By FactChecker
25th Jun 2024 15:54

"disclosing the income through SA on his record anyway" might have been appropriate IF 'the income' had been from self-employment - which this obviously isn't.

There were opportunities historically to convert W's business to a partnership or to incorporate it ... but as it stands any payment to H is as an employee but no PAYE was set-up or operated/reported/etc.

In the unlikely event that HMRC accept that H's reporting via an SA TR covers his tax liabilities ... it immediately raises a giant red flag that W's business was in flagrant non-compliance.

Run the numbers ... you may find that "disallowing a sum of wages/subcontractor fees" is the less costly option - and of course set things up properly today for the future!

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By Ozzi
25th Jun 2024 15:02

Would it be worth offering a concession to retrospectively set up a payroll scheme and make the subsequent payments? I know this is after the horse has bolted but if the officer agrees a role must have been present then this would facilitate part of that. Payments can subsequently be made.

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By lesley.barnes
25th Jun 2024 15:11

Have you calculated the difference in tax between the husband declaring his share on his return and the wife declaring the full amount? HMRC can't have it both ways either the wife declares it all and the husband declares nothing or its done as it is now.

I would get them to set up a payroll asap but what is done is done and you'll have to do the best you can.

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Replying to lesley.barnes:
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By Ozzi
25th Jun 2024 16:31

HMRC's stance is husband should amend his tax returns and reclaim any payments made to HMRC. So it is the net effect but ultimately that is incorrect because we are then saying no work has been undertaken at all.

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Replying to Ozzi:
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By lesley.barnes
25th Jun 2024 17:22

HMRC are saying that no work has been undertaken. No one is doubting the husband has been working. We also know that HMRC has deep pockets when it comes to spending tax payers money chasing for small amounts of money.

I was just exploring what the cost would be to your client if they went with HMRC view. Would it be better financially to roll over, agree with HMRC, get a refund for the husband and then do a payroll or partnership going forward. Don't forget any penalties they may add and check whether it could be suspended.

How much will it cost to fight HMRC or unwind what has been done going back however many years, set up a PAYE/Partnership retrospectively and pay fines. Don't forget to include your fees for all the additional work. Not an easy call.

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Replying to lesley.barnes:
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By Ozzi
26th Jun 2024 08:46

Thanks for your advice Lesley.

They have already advised penalties and interest will be calculated on the IT for W, so if they allow a retrospective PAYE set up for H yes there will potentially be late registration penalties but I'd hope that'd reduce the penalties and interest they'd be able to charge on W IT liability.

We're talking 3 tax years it covers, I'm really not concerned about my fees at present because I just want this all to go away. I'm prepared to put the time in to try and make this as painless as possible for all parties.

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Replying to Ozzi:
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By Paul Crowley
25th Jun 2024 17:24

If this is more than four years then that really is a problem
But would it be the case that H pays less tax and NI than W does?

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Replying to Paul Crowley:
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By Ozzi
26th Jun 2024 08:54

It's 3 years, H is BR taxpayer and W is HR taxpayer. H does pay the tax and NI as he's also in receipt of state pension.

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Replying to Ozzi:
By SteveHa
26th Jun 2024 09:50

Ozzi wrote:

It's 3 years, H is BR taxpayer and W is HR taxpayer. H does pay the tax and NI as he's also in receipt of state pension.

You keep saying this re NI. If H is of state pension age then he isn't paying NI. Neither is W paying secondary contributions because she isn't operating payroll.

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Replying to Ozzi:
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By FactChecker
26th Jun 2024 15:40

".. because we are then saying no work has been undertaken at all."

NO that is not the conclusion that results from doing that!
Amending the tax return is simply correcting figures for which neither your client nor H has any evidence (i.e. no receipt of wages or S-E income, so wrongly entered).

WHEN you (or rather client) has finally decided *exactly* on the nature of the work (including its status and treatment) - assuming these can be properly evidenced - then there will no doubt be other tax returns to amend as well!

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By cbp99
25th Jun 2024 15:14

It seems to me the use of the term 'wages' may be unhelpful, and a red herring. The husband does not seem to be an employee under a contract of service, and has been reporting his income from the business as, in effect, a subcontractor, and that is how the wife should be reporting the expense of making use of his services.

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Replying to cbp99:
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By Ozzi
25th Jun 2024 15:41

The argument is there is no audit trail for payment, HMRC's argument is the figures could just be dreamt up because there is no evidence of the payments in isolation.

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Replying to Ozzi:
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By 17RDR12
25th Jun 2024 15:53

Are they not just dreamt up?

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Replying to Ozzi:
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By cbp99
25th Jun 2024 16:02

How has the husband reached the figures that he puts on his SA (ref your response at 13.42)? Is that not a reasonable starting point for the subcontractor cost for the wife's business? (I was sort of hoping they matched up!)
How does the husband describe his trade on his SA?

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Replying to cbp99:
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By Ozzi
25th Jun 2024 16:35

Cbp99 thank you for your replies and also your helpful tone.

Yes figures on tax return of H agrees to figure on W's. Husband doesn't specifically write down an invoice, they agree it amongst themselves 'last month you worked X so that'll be £Y' but it's not formalised as a paper trail.

I feel there's an argument to be had that physically the job could not be done by one person in their late 60's, but I don't know if that's an acceptable angle to come from. It is the truthful angle!

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Replying to Ozzi:
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By cbp99
25th Jun 2024 16:45

That sounds like a good start. Next question - do the outgoings from the business bank account, net of expenses claimed on the wife's tax return, agree to the total of husband's remuneration + wife's drawings?

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Replying to cbp99:
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By Ozzi
25th Jun 2024 17:13

Yes, it would.

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By SXGuy
25th Jun 2024 16:38

From what I gather it appears husband should have been under paye or registered as a partner.

If hmrc are disallowing the payments it will be because neither of those happened, and you have no record to prove part of those transfers were his wages.

On the flip side to that, they can't then also accept H tax return submissions and tax payments as being valid either.

So from what I see two options.
First option see if the inspector will allow a retrospective submission of paye payments for the years in question and pay any employer ni that may be due.

Or ask for H tax back.

Cost benefit needs to be established as to the best course of action because simply just disallowing his payments may be the less costly approach.

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Replying to SXGuy:
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By cbp99
25th Jun 2024 16:50

It seems to me the partnership option is worth investigating. The arrangements described seem in line with the definition of a partnership: 'the relation which subsists between persons carrying on a business in common with a view of profit'.
S2(3) of the Partnership Act is also interesting: 'The receipt by a person of a share of the profits of a business is *primâ facie evidence that he is a partner* in the business', although it continues 'but the receipt of such a share, or of a payment contingent on or varying with the profits of a business, does not of itself make him a partner in the business'.
Retrospective penalties for late partnership returns would be far less than for late Paye.

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Replying to cbp99:
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By Ozzi
25th Jun 2024 17:17

I know I sound like a broken record but I am genuinely thankful for people taking the time to reply constructively.

When the officer confirmed he thought that H did work for the business, he followed it by saying with that in mind we should register for PAYE or as a partnership now. Would it be unreasonable to ask for this to be done (PAYE or partnership) retrospectively if they concede it's likely work has been undertaken? I understand the late submission stance and penalties to be issued but at least it's closer to the actual truth of the matter than it's only her business that she manages alone.

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