Are spouses’ wages fully deductible?

HMRC have recently won a tax tribunal case where they were seeking to challenge the deduction for a wife’s wages in arriving at the profits of her husband’s business. The judge agreed with HMRC that the amount allowed as a deduction should be limited based on the hours spent and appropriate rate for the work done.

The general principle here is that the expense must be incurred wholly and exclusively for the purpose of the trade. Traditionally when the personal allowance was fairly low (e.g. £6,475 in 2010) it was quite easy to justify the wages paid to the spouse at around that level. However, there have been significant increases in the personal allowance in recent years to £11,850 in the current tax year and it is important that wages paid to the spouse can be justified.

The rate of pay paid by the husband to the wife was £8 per hour which seems reasonable and is a rate that an independent employer might be expected to pay to support staff. It is interesting also that the initial deduction was £90 per week which is under the level (£116 per week, £6,032 per year) at which a PAYE scheme has to be established. Of course, if the spouse has other income then there may be a requirement to register for self-assessment or, if the other income is (PAYE) wages from an independent employer then HMRC should be informed of the income so that the PAYE code can be adjusted.