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The Independent Automotive Aftermarket Federation

Family payments: deductible or not?

Date: 17-May-2018

A 2018 tribunal case has ruled that payments a father made to his son for promotional work were not deductible for tax purposes. What went wrong, and what should be done? 

Family employees. Employing family members, including children, is a well established tax planning tool for owner-managed businesses. Provided there’s a business reason for doing so, there shouldn’t be a problem. In Nicholson v HMRC [2018] TC06293, however, the First-tier Tribunal (FTT) decided that HMRC was correct to disallow expenses for “wages” paid to the business owner’s son. So what went wrong?

Case facts. Mr Nicholson (N) claimed that his son (who was at university) helped his business by promoting it online and distributing leaflets. For the payments made to be deductible, they would have to be made wholly and exclusively for the purposes of the trade. Part of the issue was that regular wages were not paid in cash, but rather N paid some cash, and also bought goods, insurance, food and drink, etc. for his son on his credit card. In and of itself this shouldn’t necessarily cause an issue, but the FTT found that there was no way to reconcile the payments with actual work undertaken as there were no proper records regarding them. Possibly more damaging, however, were N’s assertions that if he hadn’t paid his son the money, he may have had to drop out of university. The FTT concluded that at best the payments had a dual purpose, including “parental affection”, and could not therefore be allowable.

Get it right. Ensure your clients keep robust records to allow payments to be reconciled and linked to work done. Make sure that amounts paid don’t exceed what a third party would charge for the same work, and ensure that the work is actually necessary and is done.

Pro advice. If the business is a company rather than a sole trader, it should consider making adult children directors instead of employees, as they can be paid for carrying out less frequent fiduciary duties.

The payments were held to be made out of parental affection. The business need a business motive for paying family members, and must ensure that payments aren’t excessive and can be reconciled to work. 

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