Can HMRC prove wife's pay was tax evasion?

[vplain]

I'm looking for guidance here. A friend of mine has been paid a salary for about four years by her husband's company, even though she was not working there. Recently he has fired some employees who are aware of this payment situation and she is worried they may blow the whistle. If they do, can the HMRC prove that she wasn't working for him, or should they just come clean to minimise any fines? She is now working at the company, but only for the last few months.

[robbob]

Hello vplain

All that is likely to happen in this situation is that the company would be denied corporation tax relief for the wifes salary payments if they are not of a commercial nature.
This is presuming these payments have been trated in the correct manner - I.e. NI/tax deducted if appropriate - P60 submitted to the tax office.

How this pans out would depend on the facts of the matter if it was disputed by the tax man.
So the company would have to put forward a decent argument that these payments were at commercial rates - if requested.

If you think that amendments are needed to prior years corporation tax returns seek professional advise.

[wamstax]

You might have to think whether she was working anywhere else and earning a wage there. If so was PAYE correctly operated on her "wage" from her husband's company.

Basically HMRC would not be interested in the wife however they would certainly be interested in the COMPANY claiming for wages for somebody not working there. They might also be interested in what else the COMPANY (and the director) was up to in the TAX EVASION line.

It is likely that additional tax liabilities would arise on the company (and possibly the director ) and that in addition interest and penalties would arise on top of that. I would also urge anyone caught with their trousers done and having done this NOT to think up spurious arguments about commerciality etc as HMRC Investigators have a habit of seeing through unsustainable excuses. That would then lead to higher penalties and also of course make the HMRC Investigators even more doubtful that this was the only tax evasion employed.

Additionally they might be a little interested in the tax adviser who encourages defaulting taxpayers/individuals or comapny to dream up imaginary and incorrect (or false) facts.

[Trevor Scott]

With all due respect to the poster, the stated information is second hand and it is not exactly clear whether the wife is, or is not, entitled to a salary. Whatever the true facts of this case, speak with your accountant to ensure that the salary is a reflection of real business life and that the financial structure is safe.

Unless there were other concerns, or the company was otherwise a high risk, if the wife’s salary was low then I wonder whether HMRC would even bother investigating. HMRC will immediately realise, that if the true facts are that/the directors claim, that the wife worked at home/away from the main company premises or after normal working hours at the company office, therefore undermining any whistle blowers unreliable/qualified information, then they have nowhere to go with an investigation.

Sometimes when HMRC do claim to have third party info (even if they don’t!), and they know that you know abou third party info/are paranoid, they will emphasise heavy penalties and try to bluff/frighten people into revealing other info in the hope of coming up with something. A good accountant would defend such a position robustly to ensure the client was not pressurised into making statements/admissions that can be misinterpreted/twisted/are false.

[wamstax]

Ok first thing that HMRC will ask for (if they are decent investigators ) is for evidence of the duties performed substantiated by documentary evidence. So if she didn't work there and didn't have her fingerprints on contempoaneous documentation or computer systemsthen get ready for more intensive questioning.

[vplain]

thank you all for your comments. In response to the last poster, there will be no evidence of any work done - she was supposed to complete time sheets, but never did.

[Trevor Scott]

The trouble with that approach is that even if it was the case that she never previously worked at the premises, or there not being evidence of her work on the documents (hardly a surprise in this computer age with print outs), that does not mean that she did not do another kind of work for the company. In respect of timesheets, I remember many cases of people, directors and their relatives but also “gifted” employees, who did not keep timesheets (or their timesheets were a joke) and were allowed to get away with it.

If she did not do any work and the directors were dishonest, they could simply keep their traps shut and therefore HMRC would have no evidence. This is a common problem for any investigator in any field.

Quite frankly, the poster vplain seems so sure of tax under declarations that surely the best thing she can do is get her friend to see an accountant, establish the facts/do a risk assessment and then take any corrective action from there. At least she is likely to sleep better.

[wamstax]

Silence is not golden as clearly no evidence = no deduction if you just shut up and don't either disclose or provide evidence. Remember under the new penalties provision offences are more geared to the nature of the offence e.g. intentionally putting false wages through the books than how you argue your case.
I agree with Trevor that they should be seeing an experienced tax investigation adviser and laying their cards on the table (if they think that there is a high risk of HMRC knocking on their door. But remember bona fide tax advisers will not be advocating manufacturing evidence if it doesn't exist and may well also consider it too risky letting the Inspector talk to the company representatives if an enquiry is opened.