One area in which problems may not be anticipated is when a family member’s status as a ‘genuine’ employee is disputed by HM Revenue and Customs (HMRC).

For any expenditure to be deductible for tax purposes, it must be ‘wholly and exclusively’ made for business purposes. In the case of a claim by an employee for a deduction, such expenditure must also be made ‘necessarily’.

In a recent case, HMRC took a taxpayer to task over payments to his son, who was a university student. Specifically, HMRC claimed that £7,400 paid to him was not ‘incurred wholly and exclusively for the purpose of the Appellant’s trade and deductible against his self-employment income’.

When an HMRC enquiry was opened into deductions totalling more than £23,000 in the taxpayer’s accounts, he was eventually able to satisfy them with regard to all the sums claimed except those payments made to his son. In point was the fact that the taxpayer did not actually record the ‘wages’ paid. HMRC took as their starting point the fact that the taxpayer was unable to prove that the payments had been made at all.

The taxpayer made protests, but the way his evidence was given probably did not help his case. The First-tier Tribunal concluded that the absence of evidence that the payments had been made on the basis of time records or some other methodology made it impossible to conclude that they were made wholly for business purposes. They were not, therefore, ‘directly and solely referable’ to the carrying on of the taxpayer’s trade.