HMRC internal manual

Business Income Manual

BIM47105 - Specific deductions: staffing costs: payments to dependants and close relatives

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


That an employee or director is a close relative or friend of the trade proprietor or controlling director does not mean that their wages or salary is automatically disallowed for tax. If there is no non-trade purpose to the remuneration and the quantum is not determined by the relationship then the payment does not fail the wholly and exclusively test for deduction. So where there is equal pay for equal value the amount paid is fully allowable, notwithstanding any connection between payer and recipient.

Where there is a non-trade purpose to the remuneration or the quantum is determined by the relationship, then the remuneration is not paid wholly and exclusively for the purposes of the trade and it is not an allowable deduction.

Where the facts show that a definite part or proportion of the remuneration is not wholly and exclusively laid out or expended for the purposes of the trade, profession, or vocation, you should only disallow that part or proportion.

In addition there is are statutory timing rules that defer a deduction for amounts paid more than nine months after the end of the period of account in question. There is detailed guidance on these provisions at BIM47130 onwards.

The purpose or purposes of expenditure is a question of fact to be determined by the Tribunal in cases of doubt. For guidance on how to approach the question of the purpose of expenditure, see BIM37050.

Examples of cases that have come before the Courts include:

BIM37707 Stott & Ingham v Trehearne [1924] 9TC69 - Excessive remuneration
BIM37715 Copeman v William Flood & Sons Ltd [1941] 24TC53 - Excessive remuneration
BIM37735 Moschi v Kelly [1952] 33TC442 - Wife’s wages
BIM37737 Dollar & Dollar v Lyon [1981] 54TC459 - Whether payments to children were remuneration
BIM37740 Earlspring Properties Ltd v Guest [1995] 67TC259 - Excessive remuneration - disallow the excess

What is the level of remuneration?

Evidence that the remuneration may not be a genuine trade expense is where it exceeds a reasonable level of the reward for the value of the work undertaken by that individual for the employer on a commercial basis. Where a relative/friend is paid significantly more than third parties doing the same work this is an indicator that there may be a non-trade purpose to the remuneration.

In this situation, you should consider whether the amount of the overall remuneration package, that is the combined salary, wages, benefits and pensions contributions, was paid wholly and exclusively for the purposes of the employer’s trade.

Consider the guidance from BIM46000 if the remuneration package includes a pension contribution which you consider may not be wholly and exclusively for the purposes of the trade.