TLC Loves: Bank of Mum and Dad – when you can legitimately pay your children

If you employ your adult children in your business it’s important to stay the right side of the legal line when it comes to what and how they are paid.

A recent tax tribunal ruled against a company director who had been effectively paying his adult son’s allowance and claiming it as a business expense.

The director claimed his son had been employed “promoting the business through internet and leaflet distribution and computer work”. The tribunal heard that the son had actually been helping his dad in the business but that there were no records to evidence the payment of 15 hours a week at £10 an hour it was claimed he was due.

It was suggested that payment had been made to the son partly by way of goods – the father paid a home insurance policy for the son’s university accommodation and the rest was made up of purchases of food and drink.

The tribunal concluded that Nicholson’s payments were made out of “natural parental love and affection”. There was a duality of purpose as the “wages” had a major underlying “private and personal” motive, so weren’t for the purposes of the trade. Nicholson was doing nothing more than supporting his son at university.

So what are the guidelines? Our top tips for staying on HMRC’s good side are:

•     Keep good records – it goes without saying, but keeping an accurate record of time worked for the business is the best way to prove the work was actually done
•    Make dedicated payments – make sure that your son or daughter is paid from the business account for the hours worked
•    Document an agreement – if you want to pay £10 an hour for five hours of work each week, create a simple agreement for your child to sign up to in the same way you would with any contractor or employee
•    Equal pay for equal value – don’t pay your offspring more than someone else doing the same job for the company. This would clearly suggest a dual purpose for the payments
•    The minimum wage still applies – make sure you pay at least the minimum wage, there’s no exemption just because you’re related!

As with everything, if you have a query do give one of us a call on 01937 534505 and we’ll be happy to advise on your particular situation.

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