Wages paid to Dad, not wholly and exclusively incurred

In David Cation v HMRC [2021] TC8253, the First Tier Tribunal (FTT) disallowed £30k of wages paid by a sole trader to his father and upheld £12,400 in tax penalties for error and failure to notify tax. There was no evidence to show that his father has performed the services claimed and the FTT found that the wages had been put through the books only after HMRC had given a notice of the opening of an enquiry into the taxpayer's affairs.  

HMRC opened an enquiry in 2017 into the taxpayer's affairs in respect of his 2014-15 tax return which showed income of £70,000 and expenses of £31,233.

The largest expense was £30,000, which was supported by a handwritten invoice from his father for "Sales and Marketing Support As Agreed".

Actual payments made to his father were £3,000 in 2014-15; £7,000 in 2015-16; and £20,000 in 2016-17.

Peter Cation, the father, amended his tax return in 2015-16 to cover the payments. HMRC objected to the mismatch of expense to income.

Unsatisfied that the payments made were 'Wholly and Exclusively' incurred for the purposes of the trade, HMRC disallowed the costs and raised assessments for Penalties for deliberate error and Late Notification under Self Assessment.

On appeal, the FTT heard evidence from both son and father and rejected an explanation of accruals being the reason for the mismatch in timing. It found that:

•  Any ‘assistance’ given by Peter Cation to his son was ‘occasional’, described by him as ‘a piece of fun, to cover his son’s time’ and for which he did not expect to be paid.
• The assistance given was the occasional phone calls made on his son’s behalf to follow up a submitted tender; it was neither technical nor at consultancy level.
• It was ad hoc and there was no regular work arrangement in place to engage Peter Cation’s service to support the two days a week purported to have been worked in a three-year period leading to the £30,000 fees.
• On the balance of probability, the two lump-sum payments of £10,000 each were triggered by the opening of the enquiry in January 2017 and explained why there was this mismatch in tax years for the relevant events: (a) the claim of £30,000 was made in the appellant’s 2014-15 return, (b) the payments were made in 2017-18 tax year and (c) the receipts were included retrospectively by amending Peter Cation’s 2015-16 return. 

The appeal was dismissed and tax penalties for deliberate error and failure to notify were upheld.

Useful guides on this topic

Wholly and exclusively: toolkit
What does 'wholly and exclusively' mean? How do you determine if a cost is wholly and exclusively incurred for the purpose of a trade? What cases are there? 

Penalties: Deliberate Behaviour
Enhanced tax penalties apply in cases where a taxpayer's deliberate behaviour results in a potential loss of tax revenue.

External links

David Cation v HMRC [2021] TC8253