Employing family members in your business
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Published 14 June 2021
There are various ways of running a business. People raise eyebrows when a family member joins a company. It always brings up some questions on several aspects, including the tax implications of employing family members in your industry.
Accountants have demanding roles to play in such scenarios, and lawyers also come to the fore to counter challenges and threats. Hence, their expert opinion matters a lot. Rules vary for employing family members if they have to join a family business. Let’s see how it goes.
I always mention age as the primary thing since employing minors comes under the radar of local authorities. Children aged 13 can work part-time except those engaged in fields like television, theatre and modelling. A performance license is mandatory for them.
Children of school-leaving-age can work up to 40 hours, but there are different interpretations about this age clause across the UK. If a minor child joins a family business, there are categories of remuneration for use as guidance. Another angle is “wholly and exclusively”.
Regarding minimum wages to school-aged children, it all depends on applying common sense and the “wholly and exclusively rule”. They don’t fall under National Minimum Wage (NMW). If a child wants to contribute to the family business, pocket money is more important than salary.
Children under 16 do not pay NICs, so if their total income exceeds their allowance, you can put them on a payroll which rarely happens. As a child reaches 16, he or she, gets a NIC number and becomes entitled to the NMW of at least £4.55 per hour. Rules differ for an employee who is an apprentice.
Hiring spouses or civil partner
When it comes to spouses or civil partners, the wholly and exclusively rule comes into force for both unincorporated businesses (in S34, ITTOIA 2005) and companies (in S54, CTA 2009). So, effectively, the law says that you should stick to market norms and not overpay a spouse/CP. However, you can adjust the rate if the spouse/CP is working weekends and evenings, something that an average third party employee would be much less willing to do without paying an overtime rate.
For unmarried couples, too, the same rules and regulations apply. So, for example, if my client will pay above the going rate for the job, HMRC will accept the PAYE payments but could not allow the payment for direct tax purposes.
The family partnership
The family partnership of business refers to sharing income and expenses as per mutual contract. The British tax system makes it easier to justify a shareholding than a salary due to the Arctic Systems tax case (2007), focusing on the settlement legislation. However, if you make a gift (including gifts to spouses and children), you may have to pay tax. This law will apply to spousal partnerships, and the primary earner will pay tax.
I want to refer to the Arctic Systems case. The House of Lords (now the Supreme Court) accepted HMRC’s stance that by allowing his wife to subscribe for a share in the company for a nominal £1 when there was an expectation that the company would earn significant income, Mr. Jones (the primary earner in Arctic Systems Limited) had made a “settlement” on Mrs. Jones (she did some work in the company, for which she received payment, though she also got 50% of the dividends).
Still, they rejected HMRC’s plea that this share was merely a ‘right to income’ and confirmed that the spousal exemption did apply so that they could continue with that arrangement. Going back to taxing children employee, I feel more comfortable doing tax planning at the stage of reaching their majority. It is good to pay them and make them shareholders at that stage. My views are not different about alphabet-shares if they are commercially justifiable.
It is essential to mention that paying pension and benefits-in-kind to family members is lawfully acceptable if a company follows the rules wholly and exclusively.
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