Is a tax deduction allowable for a spouse’s salary?

You have been advised by your bookkeeper that if you actually pay your partner a salary and claim it back as a business expense then HMRC will not penalise you for the tax deduction. Is this actually the case?

Payment to your other half

The advice given to you was almost certainly based on court rulings where tax deductions were refused as claimants had recorded book entries as expenses, but no wages had been paid and there were no resulting costs.

Even if the above conditions are met, you cannot guarantee that you will receive a tax deduction because not all genuine business expenses are eligible for tax relief.

Payment obligations and the necessary paperwork

There has to be an obligation to pay someone for services or goods used in your business and in the case of wages, you must usually provide paperwork as evidence of this.

It is worth noting that when a member of your family works for your business as an employee, they need to be given an employment contract. If they work for you on a freelance basis then you should provide either a formal contract or written evidence of their agreed services.

A further tax hurdle

If you are going to pay your partner for their work, there is another tax hurdle to overcome. Legally, you need to show that the expense is ‘wholly and exclusively for the purpose of the business’.

It does not make any difference if you run your business in a partnership, as a sole trader or through a company. HMRC often uses this rule to dismiss tax deductions for many different types of expenses and it argues that an expense is not wholly and exclusively incurred if the salary you pay your partner is disproportionate to the type of work and the amount of work that they do.

Testing the ruling at a tribunal

In 2017, this wholly and exclusively point was examined in a First-tier Tribunal (FTT) – McAdam v HMRC. In this case a plumber claimed a tax deduction of £90 per week for his wife, who was responsible for taking phone calls, order processing and writing up his books.

The FTT refused the tax deduction because it was argued that the amount was not commensurate with the going rate for the type of work she did. In addition, the business records were not well maintained and there was no evidence to show how much work his wife did or that she was actually employed by the business. An employment contract would have gone some way to helping the situation but would not have changed the decision.

It is worth noting that HMRC is notoriously sceptical when it comes to including a partner’s wages in your accounts.

Although we are not advocating you try and ‘hide’ anything, terms such as ‘spouse’ provide red flags to HMRC and they are then inclined to look closer. If you just use salary or wages as a description, it will be sufficient.

‘All or nothing!’

With regards to the above case, it is interesting to note that HMRC actually accepted a deduction for about half the claimed amount.

As the law only allows for a partial deduction where an ‘identifiable part or identifiable proportion’ of an expense meets the wholly and exclusively condition, this was generous. It should really be all or nothing, but it does go to prove that if you keep relevant paperwork, and you make sure you do pay the wages at a realistic rate for the work, then you should be OK.

To conclude, a tax deduction is only allowable if you have an obligation to pay your partner and that your business actually incurs costs and the pay must be commensurate with the type of work and amount of work undertaken. You should also have an employment contract or similar document, proving the obligation to pay them.

For advice or support regarding your business tax, contact ADM on 01242 679767 or email andrew@admaccountancy.co.uk

Photo by Brooke Cagle on Unsplash

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The information contained in this website is for general information purposes only. The information is provided by ADM Accountancy Services Ltd and while we endeavour to keep the information up to date and correct...
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