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HMRC internal manual

Enquiry Manual

Concluding the enquiry: calculation of duty lost: family wages

Family wages are a business expense and you must consider it like any other expense on its merits. The decision whether to allow it as a deduction can be difficult. If you are satisfied that the wages are strictly due by reference to the usual criteria, you should allow the debit on normal trading income principles, bearing in mind the effect (for accounting periods ended after 5 April 1989) of FA89/S43.

It will usually be difficult for a taxpayer to sustain a late claim to a deduction (or further deduction) for family wages. The question of remuneration (and its level) should have been carefully considered before the accounts were submitted. Little should emerge subsequently to affect it - apart possibly from the discovery of an error or mistake in the accounts or computations.

During your enquiry you may have uncovered cash diversions such as omitted takings, overstated expenses etc. The taxpayer may then claim that some, at least, of such monies have been paid out as wages to members of the family. There will usually be a dearth of evidence to support such a claim to strict tax law standards. The existence of a service contract is unlikely and if one exists there is unlikely to be evidence to show whether the terms of the contract have been implemented. There will almost certainly be no record of payment. And cash, even if it reached the employee, may have done so in the guise of housekeeping or pocket money. If however you are satisfied that a spouse, partner or family member did in fact render services commensurate with the wages claimed (notwithstanding there is no record of payment) you should modify your computation of the tax, interest and mitigated penalties in the expected offer by taking into account PAYE deductions due but not made.

The taxpayer must undertake in writing not to claim a deduction if the wages in question are paid subsequently and the letter of offer should show the full tax and NIC due before any adjustments you have agreed.