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TRADING PROFITS:
Question; Included in wages and salaries is a salary for herself (owner of the business) of £44,000 and a salary of £14,000 for her niece who works part- time for the business. Wages and salary enclosed in the profit loss account is stated at £84,440.
Shouldn’t this be treated as an allowable expense, considering she is family or if its disallowed, how should i adjust the expense into the trading profits.
your help will be highly appreciated, thanksHi Ria,
Any salary paid to the owner or to the family of the owner of an unincorporated business is allowable unless it is not excessive.
It is very common the owner of the business will try to manipulation the profit by reducing the revenue (goods for own use) or by increasing the expenditure (salary of himself or family person) to get benefit from reduced the tax.
To prevent this kind of manipulation any extra amount of salary paid to himself or to his family are disallowed.
eg if the usual salary for performing a specific job GBP 5000, but owner or any members of his family is getting paid GBP 8000 for this job, up to GBP 5000 is allowable but extra (8000 – 5000) = 3000 is not allowable. the amount GBP 3000 should be add back to the Adjustment of taxable trading profit.
on your question it is not clear that what is the reasonable salary for this job. normally you will be told on the question what is the usual salary for this job, like the the question will mention like this…….. *The person who was doing this job was paid GBP 5000, or *a person who is doing the same job are getting GBP 5000 or *the question will directly tell you the market rate for this job is GBP 5000.
once you have got the market rate of salary you can easily find out the excessive salarysalary paid – normal salary = excesasive salary
well wisher
Mahfuz
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