There are special rules for tax-deductible expenses for the self-employed. To qualify for tax relief, expenses have to be incurred ‘wholly and exclusively’ for the purpose of the business. There can’t be any indication that there is dual purpose. A recent case at the tax tribunal shows how to get it wrong. So how do you get it right?
Not like this
Mr Nicholson wanted to claim wages paid to his student son as a business expense. The son had helped with computing for many years, and when he went away to university, helped with business promotion via the internet and leaflet distribution. Mr Nicholson said, ‘Without his help I could not do my job as a central heating salesman and the Internet business I was trying to build.’
Mr Nicholson went to tribunal over payment of £7,400 wages. He argued that he paid his son less than a commercial rate: if he took someone else on to do the work, the business would have had to pay ‘an awful lot more.’ He based the figure of £7,400 on 15 hours work a week at £10 an hour.
The problem was - there wasn’t evidence that the wages had been paid like this. What actually happened was that Mr Nicholson sometimes gave his son cash, and using his own credit card, not only paid for food and drink when visiting him, but also funded the weekly student grocery shop. There were no time records for the hours worked. The tribunal therefore found that the payments had a dual purpose: although they had a business element, they also had a private element; they helped to support a son at university. Mr Nicholson lost his appeal.
When paying family members, record hours and make sure you can show payments relate to work done. The tribunal was looking for ‘some form of methodology in calculating the amount payable and an accurate record maintained of the number of hours his son worked.’ Had Mr Nicholson done this, - without having to appear before a tax tribunal.