Laws and Rules of Accounting

Paying family members – Is it hard work or just love?

Recent HMRC cases against individuals and businesses have once again shone a light on the use and payment of family members in the business.

In one case, a tribunal judged that payments to a son had been made out of parental love and affection and were not wholly for the purposes of the trade. In this instance the person in question had claimed a substantial amount of payments to the son as part of a self-assessment return, thus reducing the overall tax bill. But investigation by HMRC showed that there was little evidence that the son had a) actually delivered the work being claimed for, or b) been paid the amount claimed. It turned out that rather than direct payment, the total amount being claimed was made up of food, utility and insurance bills supporting the son during his time at university.

Had the claimant paid the son on a time recorded basis, through PAYE or was able to provide some form of methodology or tangible delivery in retrun for the payment, it is likely that the amount would have been classed as an allowable and legitiamte business expense. But because it was paid indirectly and assumed a set number of hours every month, the tribunal dismissed the claimants appeal and ruled that the work, whether provided or not, could not be proven as wholly for the benefit of the business.

Whilst HMRC recognises that many businesses call on family members for ad-hoc or casual support and that payment can sometimes be a gesture of goodwill rather than a true remuneration, these recent cases remind us that there is a fine line from a tax perspective. However minimal or infrequent help and support from family members may be, it is always worth maintaining a formal record or ensuring that the amount being paid is reflective of the work being undertaken and/or the skills of the person undertaking it. Where possible it should also be paid in a transparent and auditable way.