One of my clients receives a great deal of help from his wife. He has several jobs and a couple of self employments which put him into the 40% band. Until now he has never paid his wife anything even though she used quite a bit of her time and petrol running about for him, arranging appointments, doing the books etc. I advised her to register a self employment and invoice him for her time spent on his business which brings the client back into basic rate. I see this as nothing more than de facto recognition of what is happening in real life. Now that we are obliged to reveal tax avoidance schemes I wonder if this is the kind of thing which would be covered by the rule. I'd welcome input from colleagues. All the best and thanks in advance - John
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No it's not an avoidance scheme
Hopefully employing someone never will be!
As neileg says however I'd be dubious about justifying his wife's duties as self employment. In the vast majority of such arrangements the role is an employed one.
Why not make her a partner?
The wife could then get a sensible profit share taking account of her efforts.
Tax Planning in Arrears
Tax planning in arrears is never a great idea. Bite the bullet and either make her a partner or employee from now on if that's the road that the client wants to follow. But it's not a tax avoidance scheme in the sense of filling boxes in on the Tax Return.
Just wondering .....
.... why the partnership is not good but the self employment is ? Are you trying to create a loss for the husband to set against his employment income or summat ?
Maximum Income
Oh I agree that the maximum you can pass is the whole of the self employed income. But I don't understand why she needs to be self employed on her own account to do that.
Now totally confused
If the bulk of his income is from employment, how are you going to get a deduction for her wages or her fees if she is self employed? What you seem to be suggesting is that by paying her, his taxable employment income is reduced. That's a good trick if you can do it. Higher rate tax payers will beat a track to your door (including me).
I think you may be
I can't see HMRC accepting that creating a loss with wife's wages is a legitimate commercial situation.Create a loss in his self employment and set it against his other income in the year. Am I missing something here?
Employment and tests
If she is running about for him, arranging appointments, doing the books etc, it appears she is more likely to be an employee. HMRC look at wife's wages for actual payment rather than book entry and the payment is commensurate with the work done at market rates.
Then there are the two self employments both generating low profits. Is there anything to be gained from her self employment or a partnership? If the profits are low and then a salary creates losses are they commercial?
On the DOTA front, paying a salary for work done would not be notifiable, otherwise each P45 or P46 would entail notification.
Self employment might reduce the 40% charge or create a loss but watch for Class 2 and 4 offsetting any benefit, plus a tax return because there is self assessment.
Partnership, is it really worth it when there are two businesses. No loss possibility in either, class 2 and class 4 possible, 2 partnership returns and an extra tax return could well wipe out the benefit.
Back dating
What particularly concerns me is that you seem to be changing history (correct me if I've inferred incorrectly). She doesn't seem to have had an income until you realized her husband had strayed into the higher rate. If you're just talking about the future - that's a different matter, obviously.
@TaxMatters, I don't wanna be somebody turned up in the middle of a movie, but just wondering... have you thought about putting all of his eggs in to one basket. since he has 7 jobs & 2 self-employments, can he not put everything under a company. I reckon its a pretty contestable case of IR35 rules in case HMRC objects. As you are aware, depending on the nature of his profession, his 7 (part-time) employers might allow him to raise invoices rather than wasting time processing payroll report, paying NI (empr contri) and catching up his Tax Codes. On the other hand, company can deal with all sorts of his businesses and can either employ his wife or make another shareholder (with a mix of salary & dividends). This way optimising expense claims and only 20% corp tax, no personal taxes for both and lots of administrative time saving..... ?
And answer to your basic query ..... If he operates on de facto basis, i.e; paying his wife for actual expenses . that is not a scheme as there is no simple option that would generate extra tax therefore nothing to disclose.
Number
If you report a tax avoidance scheme, don't you need a scheme number ? (Damn - saw Mr Probiz at the match on Wednesday - I could've asked him).
ijaz77 has the answer
incorporate the business split the shares 50/50 give both of them 7800 a year salaries...save about 4k a year in tax put accounts fees up 750 and charge em 300 for the company
win win