A question that often comes up in client meetings is whether it is a good idea to pay a salary to a spouse. Where the spouse is paying tax at a lower rate or has some unused personal allowance this can appear an attractive way to reduce the overall tax bill.
HMRC are not mugs however and can take a dim view of using this kind of artificial “income shifting”. If the salary is not justified the payments will not qualify for a deduction from tax in the business, they can also treat the salary as if it was paid to the spouse with the higher rate and there can be a penalty for trying to evade tax.
The obvious way to protect yourself from this is to make sure the spouse has a genuine role within the business, such as making sales calls, credit control or market research, however the salary paid will have to be appropriate to the level of the work done and the hours worked.
For limited companied a way round this is to make them a director for which they can be paid ‘directors fees’ in exchange for attending board meetings and adding their signature to occasional documents. For this a fee of £500 to £1,000 a month seems reasonable. It is hard for HMRC to attack the level of directors fees as unlike a regular job there is no way to benchmark them, and if there is any question over the amount of work done the board minutes will document their attendance.
HMRC has announced that it is re-launching its business records checks and will be checking businesses in the South West in February 2013. Businesses will be selected on a risk basis so cash based businesses are likely to be targeted as are small businesses.
If the records kept are found lacking HMRC could decided the business would benefit from what they euphemistically term “tailored educational support” in other words guidance on what to do better followed by a secound visit after 3 months to check for improvements and then a penalty if the business still fails to comply.
When this was last carried out in 2011 36% of the businesses visited had issues with record keeping, 10% of which were considered serious enough for a follow up visit.
The benefits of keeping good records even for simple businesses are far greater than meeting HMRC regulations and being able to show you have paid the right amount of tax. Good record keeping is not always a priority when running a business, but if you can include good record keeping procedures as part of strong systems then this will have wide ranging benefits, including greater efficiency, less time wasted and less risk of fraud and theft.
The better quality information available means it is easier to get the best deal from suppliers, and to ensure all work is billed and debts collected as well as having better knowledge of how the business is performing. To say nothing of making the business more saleable and hopefully incurring lower accountancy bills as your accounts become easier to compile.
I am experienced at designing and evaluating systems for businesses of all sizes so please give me a call or email if you feel you would benefit from being more in control of your business.