Sole trader employing spouse 3 November 2022 at 12:23PM in Employment, jobseeking & training 3 replies 183 views

a68c

I have an income of c10K as a sole trader, alongside my employment (40% bracket).
I could justify paying my spouse maybe £50 per week for work she does to facilitate that secondary income - she is otherwise non-earning.
I am told by a colleague that HMRC have lost a test case, meaning that spousal payment cannot be scrutinised and that in fact she could be paid the entire £10K - presumably she would have to be my employee.
Is this information correct? Putting aside any moral arguments, I am sceptical that this is allowable.
Thanks

Marcon

a68c said:

I have an income of c10K as a sole trader, alongside my employment (40% bracket).
I could justify paying my spouse maybe £50 per week for work she does to facilitate that secondary income - she is otherwise non-earning.
I am told by a colleague that HMRC have lost a test case, meaning that spousal payment cannot be scrutinised and that in fact she could be paid the entire £10K - presumably she would have to be my employee.
Is this information correct? Putting aside any moral arguments, I am sceptical that this is allowable.
Thanks

Ask the colleague to give you a link to this mythical case, which seems to completely overlook that catch-all provision known as General Anti-avoidance Rule.

Of course HMRC can scrutinise any salary you pay her - and if you are a sole trader, rather than employing her through your own limited company, it is highly likely they will. She would certainly have to be an employee and you could be called upon to demonstrate what exactly she does to earn her £10K, or whatever you pay her. 

stig

Your colleague may possibly be thinking of the situation where you run the business via a partnership between your spouse and yourself - in which  case the profits can be allocated according to the partnership agreement and don’t have to reflect the input of either partner, either in capital introduced or in effort. 

However if the business remains yours, then any salary would indeed need to pass the same tests as any other business expense to be an allowable deduction.

One reason for the  difference in treatment is that in a partnership, the profit returned to HMRC isn’t reduced by the way in which the partners allocate it, but in a case of paying a spouse an inflated salary the effect is to return lower profits for the business than is really the case, so the profits are understated.

baser999

No real issue in paying her a salary provided it can be substantiated should HMRC ask. Does she act as secretary, write up your books, produce invoices etc. If her involvement is purely taking a message when you’re out, it’s difficult to argue any case that she’s working for you.