What wages do you pay your spouse?
Jan 05, 2018
Business Advice Tax
A recent tax tribunal has highlighted how carefully business owners need to act when claiming tax deductions for wages paid to their spouse or family member.
If you run your own business, whether it be directly as a sole trader, via a partnership, or through a limited company, it’s not uncommon for your spouse or family member to do some work for you. The expenses of their wages are tax deductible, and most claims are entirely valid and commercially justifiable.
The conditions for claiming tax deductions
Nevertheless, it’s worth remembering that certain conditions need to be met – it’s not just a case of regularly claiming deductions on an arbitrary basis. To be a legitimate expense, your spouse’s wages must be incurred wholly and exclusively for the purposes of your trade. Other key criteria are as follows:
- Their wages must be realistic and not overstated. They should accurately reflect the actual work done, and the amount it would cost to employ someone else to do that specific job.
- All payments made must be recorded in the business accounts, and provide sufficient evidence to support the level of activity undertaken.
- The wages your spouse earns must actually be paid to them, and not just feature as mere accounting entries.
The case of McAdam vs. HMRC
The example of a high-profile case last November (McAdam vs. HMRC 2017) flagged how important it is to meet these conditions. The case, which was won by HMRC, concerned a self employed plumbing and heating engineer who was paying his wife £90 a week for various administrative duties she carried out. The tribunal ruled that these wages were excessive for the work completed, and agreed with HMRC that the amount allowed as a deduction should be limited to 3.5 hours per week at £8 per hour, amounting to £1,344 per annum. The other key issue identified in this case was the lack of evidence produced by Mr McAdam to support the ‘nine or ten hours per week’ which he claimed his wife worked.
This situation emphasises the importance of keeping records of your spouse or family member’s working activities, and also ensuring their wages are reasonable if you are to secure a tax deduction.
If you have any queries about tax deductions please get in touch with one of the Paish Tooth team and we’ll be happy to help.