BIM47105 - Specific deductions: staffing costs: payments to dependants and close relatives

Introduction

That an employee or director is a close relative or friend of the business proprietor or controlling director does not mean that their wages or salary is automatically disallowed for tax. If there is no non-business purpose to the remuneration and the quantum is not determined by the relationship then the payment does not fail the ‘wholly and exclusively’ test for deduction (ICTA88/S74 (1) (a) and ITTOIA05/S34). So where there is ‘equal pay for equal value’ the amount paid is fully allowable, notwithstanding any connection between payer and recipient.

Where there is a non-business purpose to the remuneration/ the quantum is determined by the relationship, then the remuneration is not paid wholly & exclusively for the purposes of the trade and it is not an allowable deduction.

Where the facts show that a definite part or proportion of the remuneration is not wholly and exclusively laid out or expended for the purposes of the trade, profession, or vocation, you should only disallow that part or proportion (ITTOIA/S34 (2) and the judgement of Lord Reid in Ransom v Higgs [1974] 50TC1 at page 82).

In addition there is are statutory timing rules at FA89/S43 and ITTOIA/S36 that defer a deduction for amounts paid more than nine months after the end of the period of account in question. There is detailed guidance on these provisions at BIM47130 onwards.

The purpose or purposes of expenditure is a question of fact to be determined by the Commissioners in cases of doubt. For guidance on how to approach the question of the purpose of expenditure, see BIM38220.

Examples of cases that have come before the Courts include:

What is the level of remuneration?

Evidence that the remuneration may not be a genuine business expense is where it exceeds a reasonable level of the reward for the value of the work undertaken by that individual for the employer on a commercial basis. Where a relative/friend is paid significantly more than third parties doing the same work this is an indicator that there may be a non-business purpose to the remuneration.

In this situation, you should consider whether the amount of the overall remuneration package, that is the combined salary, wages, benefits and pensions contributions, was paid wholly and exclusively for the purposes of the employer’s trade.

You should note that with effect from 6 April 2006 the monetary limits in respect of contributions to pension schemes have been significantly increased. This in itself provides a genuine opportunity and incentive for an increase in the level of contributions payable to the workforce in general. If, having established the relevant facts and considered the guidance at BIM46000, you consider that a pension contribution was not or may not have been made wholly and exclusively for the purposes of their trade, you should first make a report to CAR Pension Scheme Service Technical Team, Yorke House, Castle Meadow Rd, Nottingham, NG2 1BG before challenging the deduction.