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07 June 2018

Tax relief denied for salary paid to taxpayer's son while at university

In a recent tribunal case, HMRC were successful in denying tax relief to a self-employed taxpayer who made salary payments to his son while at university.

In the case of Nicholson vs HMRC [2018] Mr Nicholson claimed that his son helped his business by promoting it online and giving out leaflets, while he was at university.

As a sole trader, to secure tax relief for any business expense you need to be able to demonstrate that it was incurred ‘wholly and exclusively’ for the purposes of the trade. However, in this case, Mr Nicholson did not pay his son regular wages – instead he made a few odd salary payments, and also bought some goods, insurance, food and drink etc for his son on his credit card.

The sporadic nature of the payments made it difficult to reconcile them to when the marketing work was carried out, and there were no proper salary records maintained. This led HMRC to contend that there was a duality of purpose to the payments made to Mr Nicholson’s son, not helped by Mr Nicholson asserting that if he had not paid his son these amounts, he may have had to drop out of university. The First Tier Tribunal upheld HMRC’s view that the payments where not ‘wholly and exclusively’ for the purposes of the trade, and tax relief for the payments was denied.

This case highlights the importance of keeping accurate payroll records, and making regular salary payments to family members, just as you would with any other employee. We have a number of clients who have employed their children in the summer holidays and at other points throughout the year to help out in their businesses. Providing robust records are maintained then this remains a very tax efficient way to help your children through university.

For further advice on this matter please contact me.


Key Facts:

  1. 2018 Tribunal case denied tax relief for sole trader’s salary payments to his son for marketing
  2. His son was at university, the payments were sporadic, and there were no proper records
  3. The taxpayer admitted that his son would have dropped out of uni without the payments
  4. To get tax relief an expense must be ‘wholly and exclusively’ for the purposes for the trade
  5. With proper records and regular payments, employing the kids while at uni remains tax efficient

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