Tax avoidance - Can a company pay someone for no work?
Discussion
I've heard of situations recently where a company "employs" someone for no work. A typical example would be the director's wife.
She has a job title and pays tax on the earnings, but doesn't actually do anything at all.
The purpose of this is so that between them, the director and his wife pay less tax.
Is this legal?
I've googled it, but all the answers refer to slightly different situations, or false identities etc.
Presumably, if a company wants to pay someone to sit at home and drink cups of tea, they can do...
She has a job title and pays tax on the earnings, but doesn't actually do anything at all.
The purpose of this is so that between them, the director and his wife pay less tax.
Is this legal?
I've googled it, but all the answers refer to slightly different situations, or false identities etc.
Presumably, if a company wants to pay someone to sit at home and drink cups of tea, they can do...
It is common practice to use your partner's tax allowance to offset against your tax due for sole traders and ltd directors. My accountant suggested this to me only the other day, though my partner is in full time employment so has no spare allowance.
You earn 30k in a year, your allowance is £11k, you pay tax on £19
Or
You earn £30k, you employ your wife as a secretary. You use yours and her allowances, £22k, and pay tax on the remaining £8k
I might be wrong in the details but that's the general idea.
Very common and not illegal.
You earn 30k in a year, your allowance is £11k, you pay tax on £19
Or
You earn £30k, you employ your wife as a secretary. You use yours and her allowances, £22k, and pay tax on the remaining £8k
I might be wrong in the details but that's the general idea.
Very common and not illegal.
TwigtheWonderkid said:
Bennet said:
I've heard of situations recently where a company "employs" someone for no work.
Presumably, if a company wants to pay someone to drink cups of tea, they can do...
Looking around the office, my company appears to be doing that for about half my colleagues. Presumably, if a company wants to pay someone to drink cups of tea, they can do...
We also have quite a few people who allegedly were poached and given token positions within the company so that they can bring customer details from competitors with them. I've not seen these people do any actual work but they do turn up everyday and drink a lot of coffee.
I employ my wife in my business.
She's got diabetes and arthritis so a normal 9-5 job would be difficult so I employ her to do 'admin'.
She answers the phone occasionally but nothing I couldn't do myself.
But if I didn't employ her she would either be on jobseekers (or whatever it's called these days) or disability so I'm not losing sleep over anybody thinking I'm fiddling the system.
Any salary and/or pension contribution made by a business to a wife must be justifiable as a commercial expense of the company, otherwise it will not be tax deductible for the company i.e. the wife should be able to demonstrate services provided to the business at market value rates equivalent to the total benefit received.
How much this is enforced/enforceable is the next question.
How much this is enforced/enforceable is the next question.
Lots of people get paid for doing nothing, consultants may be on a retainer, staff who are on-call etc. These people simply get paid for being available, So perfectly legitimate.
For a Sole Trader employing a partner, let's say you get home and discuss the business with your partner and between you make a critical decision for the business, isn't that consultancy? I'm sure if you wanted to discuss the business with a consultancy firm they wouldn't work for free.
It's also perfectly legal through the Tax system in the UK otherwise accountants wouldn't recommend it.
Don't see a problem with it.
For a Sole Trader employing a partner, let's say you get home and discuss the business with your partner and between you make a critical decision for the business, isn't that consultancy? I'm sure if you wanted to discuss the business with a consultancy firm they wouldn't work for free.
It's also perfectly legal through the Tax system in the UK otherwise accountants wouldn't recommend it.
Don't see a problem with it.
RogerDodger said:
PhilboSE said:
How much this is enforced/enforceable is the next question.
Enforced: never heard of it and every director I know with a stay at home wife has her on the books :-)PhilboSE said:
Any salary and/or pension contribution made by a business to a wife must be justifiable as a commercial expense of the company, otherwise it will not be tax deductible for the company i.e. the wife should be able to demonstrate services provided to the business at market value rates equivalent to the total benefit received.
Can you please provide the relevant legislation to back up your statement?GAAR comes in to play...
- The GAAR took effect from 17 July 2013 and is intended to counteract ‘tax advantages arising from tax arrangements that are abusive’.
- Tax arrangements exist where obtaining a tax advantage is ‘one of the main purposes’ of the arrangements, which clearly gives potentially wide scope to the legislation and the need to consider its provisions when undertaking tax planning.
So if the employment of a wife is purely to pay less tax, then it could fall foul of GAAR.
However, I've not come across it as something that HMRC have a specific interest in such as IR35.
Bert
- The GAAR took effect from 17 July 2013 and is intended to counteract ‘tax advantages arising from tax arrangements that are abusive’.
- Tax arrangements exist where obtaining a tax advantage is ‘one of the main purposes’ of the arrangements, which clearly gives potentially wide scope to the legislation and the need to consider its provisions when undertaking tax planning.
So if the employment of a wife is purely to pay less tax, then it could fall foul of GAAR.
However, I've not come across it as something that HMRC have a specific interest in such as IR35.
Bert
BertBert said:
GAAR comes in to play...
- The GAAR took effect from 17 July 2013 and is intended to counteract ‘tax advantages arising from tax arrangements that are abusive’.
- Tax arrangements exist where obtaining a tax advantage is ‘one of the main purposes’ of the arrangements, which clearly gives potentially wide scope to the legislation and the need to consider its provisions when undertaking tax planning.
So if the employment of a wife is purely to pay less tax, then it could fall foul of GAAR.
However, I've not come across it as something that HMRC have a specific interest in such as IR35.
Bert
Surely it would be difficult to prove as well- The GAAR took effect from 17 July 2013 and is intended to counteract ‘tax advantages arising from tax arrangements that are abusive’.
- Tax arrangements exist where obtaining a tax advantage is ‘one of the main purposes’ of the arrangements, which clearly gives potentially wide scope to the legislation and the need to consider its provisions when undertaking tax planning.
So if the employment of a wife is purely to pay less tax, then it could fall foul of GAAR.
However, I've not come across it as something that HMRC have a specific interest in such as IR35.
Bert
KevinCamaroSS said:
PhilboSE said:
Any salary and/or pension contribution made by a business to a wife must be justifiable as a commercial expense of the company, otherwise it will not be tax deductible for the company i.e. the wife should be able to demonstrate services provided to the business at market value rates equivalent to the total benefit received.
Can you please provide the relevant legislation to back up your statement?For individuals: ITTOIA 2005, s 34(1)(a)
For businesses: CTA 2009, s 54(1)(a)
Both of which have the same content;
"Expenses not wholly and exclusively for trade and unconnected losses
(1)In calculating the profits of a trade, no deduction is allowed for—
(a)expenses not incurred wholly and exclusively for the purposes of the trade, or
(b)losses not connected with or arising out of the trade.
(2)If an expense is incurred for more than one purpose, this section does not prohibit a deduction for any identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purposes of the trade."
And some case law:
The amounts must be realistic and not excessive for the work done (e.g. Copeman v William Flood and Sons Ltd [1941] 1 KB 202);
The payments must be recorded in the business records (and PAYE operated as appropriate) (e.g. Abbott v CIR [1996] SSCD 41); and
The amounts must actually be paid to the spouse for the work done, and not be mere accounting entries (e.g. Moschi v Kelly CA 1952, TC 442).
Edited by PhilboSE on Thursday 19th April 12:25
pavarotti1980 said:
BertBert said:
GAAR comes in to play...
- The GAAR took effect from 17 July 2013 and is intended to counteract ‘tax advantages arising from tax arrangements that are abusive’.
- Tax arrangements exist where obtaining a tax advantage is ‘one of the main purposes’ of the arrangements, which clearly gives potentially wide scope to the legislation and the need to consider its provisions when undertaking tax planning.
So if the employment of a wife is purely to pay less tax, then it could fall foul of GAAR.
However, I've not come across it as something that HMRC have a specific interest in such as IR35.
Bert
Surely it would be difficult to prove as well- The GAAR took effect from 17 July 2013 and is intended to counteract ‘tax advantages arising from tax arrangements that are abusive’.
- Tax arrangements exist where obtaining a tax advantage is ‘one of the main purposes’ of the arrangements, which clearly gives potentially wide scope to the legislation and the need to consider its provisions when undertaking tax planning.
So if the employment of a wife is purely to pay less tax, then it could fall foul of GAAR.
However, I've not come across it as something that HMRC have a specific interest in such as IR35.
Bert
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