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Business Income Manual

HM Revenue & Customs
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Wholly and exclusively: duality of, or non-trade, purpose: remuneration, etc: relative's wages

S34 Income Tax (Trading and Other Income) Act 2005, S54 Corporation Tax Act 2009

Must be wholly and exclusively for the purposes of the trade

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 v Lyon [1981] 54 TC 459 (see BIM37737).

The Courts considered the deductibility of wages in respect of the taxpayer’s wife in the case of Moschi v Kelly [1952] 33 TC 442.

In that case, Bension Moschi was trading as an underwear manufacturer. In the accounts of his business for each of the five years to June 1945, there were deductions claimed in respect of wages to Mr Moschi’s wife although these amounts were not paid out but instead credited to Mr Moschi’s own account.

Following an investigation into Mr Moschi’s accounts, assessments to Income Tax and Excess Profits Tax (under a regime which preceded the current system of taxing trading income from self-employment) were raised, with no deduction allowed for the amounts charged as the wife’s wages. Mr Moschi appealed against various aspects of those assessments, including the denial of a deduction of the wife’s wages.

Neither the taxpayer nor his wife attended the Commissioners’ meeting at which his accountant represented him.

The General Commissioners found 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 Mr Moschi’s various and changing explanations on other aspects of the appeal as a ‘tissue of falsehoods’, Donovan J went on to consider whether a deduction was due for wife’s wages.

You should note that the decision to disallow was 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 S36 Income Tax (Trading and Other Income) Act 2005 which precludes deduction for remuneration paid more than nine months after the end of the period of account in question (see BIM47130). The rule is found in S1288 Corporation Tax Act 2009 for companies.

The extract of the judgment 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.’