When considering a claim to deduct wages paid to relatives or
connected persons you should look to establish that the reason for
payment is wholly and exclusively for the purposes of the trade. If
there is another reason (either in addition or instead) then the
deduction will not be allowable.
The deductibility of payments made to minor children and said
to have been wages was considered in Dollar & Dollar v Lyon
[1981] 54TC459 (see
BIM37737).
The Courts considered the deductibility of wages in respect
of the taxpayer’s wife in the case of Moschi v Kelly [1952]
33TC442.
Bension Moschi a refugee from Germany, came to the UK on
various occasions between 1931 and 1934, and commenced trading as
an underwear manufacturer in September, 1933. During the period
from 1938 to 1944 he introduced new capital into his business to
the extent of £29,000 and in 1945 he possessed jewellery of
the estimated value of £10,000. In the accounts of his
business for each of the five years to June, 1945, there were
deducted sums in respect of wages to Moschi's wife although these
amounts were not paid out but credited to Moschi's own account.
Assessments to IT and Excess Profits Tax were raised to
include as profits the £39,000 capital accumulated, allowing
no deduction for the amounts charged as wife's wages. Moschi
appealed.
Neither the taxpayer nor his wife attended the
Commissioners’ meeting at which his accountant represented
him.
The General Commissioners found that the cash introduced came
from hitherto undisclosed takings and that the wife’s wages
claimed were inadmissible. They confirmed the assessments.
In the High Court Donovan J held that the Commissioners'
decision was correct. After describing Moschi’s various and
changing explanations as to the sources of capital introduced as a
tissue of falsehoods, Donovan J goes to consider whether a
deduction is due for wife’s wages.
You should note that the decision to disallow is not based on
the mere fact of non-payment. There was sufficient for the
Inspector to challenge the bona fides of the wages and no evidence
from the taxpayer, beyond the unreliable and discredited accounts,
to support the claim. Now the taxpayer would also face the
statutory hurdle of FA89/S43 see
BIM47130).
For those who do not have ready access to tax case volumes,
the part of Donovan J’s judgement (Moschi v Kelly [1952]
33TC442 on page 447) on which the above guidance is based is set
out below:
There is another point in the case, which is
this: in Mr. Moschi's accounts there were various debits for wages
for the Appellant's wife, ranging from £500 in 1940 to
£1,500 in each year between 1942 and 1945. But though these
sums were so charged in the accounts, the moneys were credited to
the drawing account of the Appellant himself. On that the Inspector
of Taxes said: ‘They have not been paid to the wife;
therefore, no deduction is permissible.’ Mr. Simon says
whether the sums have actually been paid or not to the person
entitled to the salary does not determine the question whether the
payer is entitled to deduct them in his business accounts, and I
quite agree. When you are computing business profits, if you deduct
a genuine salary it does not matter that at the particular moment
when you are considering the taxation liabilities of the business
that salary has not been paid, any more than it matters whether the
price of goods bought has actually been paid at that particular
moment.
But of course this question goes a good deal
deeper than that, because here were Mr. Moschi's accounts under
very serious challenge, and here the Commissioners were confronted
with the situation that although these sums had been debited as
salary to the wife they had been credited to the Appellant's
drawing account. Whatever the Inspector of Taxes may have
contended, he was not going to allow the deduction unless the
Commissioners themselves permitted it.
Mr. Moschi was not before the Commissioners to
say he had paid or intended to pay the wages; Mrs. Moschi was not
there to say she had or would, receive them. It was the
Commissioners' duty to be satisfied, now that the matter was
challenged, that these wages were genuine wages payable to Mrs.
Moschi, and they had no evidence before them to establish beyond
doubt that proposition. On the contrary, they had evidence before
them which tended to show that these moneys were paid to or at
least put at the disposal of Mr. Moschi himself; and they had
evidence before them, too, that Mr. Moschi's accounts in general
were certainly not to be relied upon. There was only one course, in
my judgment, the Commissioners could have followed, and that is to
say they were not satisfied these were genuine wages at all. What
in fact they said was that the amounts shown in the accounts as
wages to Mrs. Moschi are not an allowable deduction for taxation
purposes, and in the circumstances neither were they.
