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The figure £84,825 for wages and salaries includes the annual salary of £15,500 paid to Jeremy’s wife. She works in the clothing shop as a sales assistant. The other sales assistants doing the same job are paid an annual salary of £11,000.
In the solution they have added back £4,500 to the profit (£15,500 – £11,000). Why would they add back the difference between the traders wife’s salary and the other sales assistants?
Well, the taxman will not allow the family to be paid more than the other employee. Here the wife is working as a sales assistant and other sales assistant are paid 4,500 lower. That is why it is added back. That extra 4,500 is not allowed to be treated as an expense, so Jeremy needs to pay extra tax for that 4,500.
I hope that make sense.
Ratna1238
yes i understand what the solution is saying but i just think its an odd rule, one which i haven’t seen in the course notes :S
It isn’t an odd rule. The tax authorities treat the payment as distribution of profits. The wife is a connected person and is being paid above those of a similar role. As such the additional payment is not allowable for tax purposes.
If the reverse were true and all other employees were paid 15500 and the wife 11000 for the same role, then there would be no add back for the difference of workers salary.
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