Bank of Dad: Son’s allowance not a business wage

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Julie Cameron highlights the need for a business motive, a commercial approach and watertight records when paying relatives.

Deduction claimed

The first tier tax tribunal (FTT) considered a deduction for wages payments by a sole trader to his student son Mark in the case of Nicholson v HMRC (TC06293). Following an enquiry into Nicolson’s 2013/14 tax return, HMRC disallowed £7,400 as failing the test in TMA 1970, s 34(1). This denies relief for expenditure not paid “wholly and exclusively for the purposes of the trade”. HMRC’s closure notice was made on this basis.

Nicholson claimed that Mark had been employed in “promoting the business through internet and leaflet distribution and computer work”, and the tribunal heard that Mark had indeed been helping his dad in the business. His wages had been calculated at a rate of £10 per hour for 15 hours per week, but the tribunal noted that there was no evidence to support wages being paid on this basis. HMRC had rejected the claim because of a lack of contemporaneous records preventing a successful reconciliation from the business bank statements.

The appeal

Nicholson stated that payments to his son had been paid partly through ‘provision of goods’. He had identified £1,850 cash by reference to Mark’s bank statements and paid a monthly direct debit of £18.51 for his son’s home insurance. However, the bulk of the claim was based on Nicholson senior buying food and drink to help support his son at university.

Recalling an earlier judgement in Dollar & Dollar v Lyon (HM Inspector of Taxes)[1981] CH D54 TC 459, involving payments to family members, the tribunal concluded that Nicholson’s payments were made out of “natural parental love and affection”. There was a duality of purpose as the “wages” had a major underlying “private and personal” motive, thus not for the purposes of the trade. Nicholson was doing nothing more than supporting his son at university. The tribunal therefore dismissed the appeal.

For the record

For many parents, the prospect of help from the younger generation in handling technology must seem attractive. If one wants to employ one’s children in the business to work on say, website creation and management, how would one go about making sure the cost is tax deductible? The Nicholson case gives us some pointers.

Firstly, it is important to have a reliable recorded basis on which payment is to be made to the offspring. The tribunal commented that the likelihood of a successful claim would have been increased had there been payment on a time-recorded basis, or a methodology in calculating the amount payable plus an accurate record of the hours worked.

It did not help that payments could not be directly identified from Dad’s business bank account. A direct link between the business account and the recipient’s account would clearly be advisable. Whilst the tribunal did not mention this, presumably a basic agreement between the business and Mark could have included the rate of pay and how remuneration was to be paid.

Keep it commercial

In keeping with previous decisions, there was no suggestion that employing one’s relatives was an issue in itself. What is important when employing relatives or close friends is the commerciality connecting the rate of pay made for the duties undertaken. “Equal pay for equal value” would prevent a suggestion of dual purpose and also help refute allegations of excessive payments to family members as a means of extracting monies from the business.

Excessive remuneration did not apply to Nicholson; as he pointed out, the stated rate of pay for Mark was lower than if Nicholson had employed an independent third party.

The Dollar v Lyon case concerned very young children and their “wages” were deemed to amount to nothing more than pocket money. Whilst the legality of employing minors was considered, the comment was made that illegal payments would not necessarily prevent a tax deduction.

However, in paying one’s children, legal issues such as the national minimum wage should also be borne in mind.

About Julie Cameon


Freelance chartered tax adviser and writer focussing on private client and tax adminsitration for individuals, I also volunteer for Bridge the Gap.


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