By Brian Keegan
The position of the individual is fundamental to the way income taxes in Ireland are applied.
An individual taxpayer receives tax credits, rate bands and allowances in their own right, and it is unusual for the transfer of allowances and credits to someone else to be permitted.
There are tax pitfalls associated with working with family members, because sometimes it is regarded as transferring income from one individual to another to reduce tax, while keeping the income within the family unit.
For instance, people in business in their own account won’t usually benefit in tax terms if they introduce their children into the trade or profession as their business partners.
There’s one important exception to this for farmers, called the Succession Farm Partnership Scheme.
This is a tax incentive administered by Teagasc where the farmer and his or her successor work in an approved partnership which culminates in the transfer of the majority of the farm assets to the successor.
What happens if you employ a family member?
Once employment law requirements are satisfied, there is no legal impediment to a parent employing one or more children in the family business.
Because of the suspicion in the tax code of parent-child income transfers, Revenue tends to examine the hiring of a family member particularly carefully to satisfy themselves that there is no whiff of tax avoidance arising from a bogus employment.
The key to staying on the right side of Revenue while employing a family member is to make sure that the wages are paid wholly and exclusively for the purposes of the business.
The rate of pay has to be justifiable for the work which the family members are doing. There has to be some commercial basis for the wage.
Paying a family member a full-time salary for weekend work won’t cut it.
Another consideration is that the wages must actually be paid over. It’s not enough to put the pay through payroll if the family member never receives it.
Lastly, Irish tax law doesn’t allow any tax benefits for making illegal payments. An illegal payment could include wages to a child who is working underage.
So once you have met the business purpose and legality conditions, you then have to show that wages are properly accounted for.
All wages paid by the business to any employee, family member or not, will be subject to PAYE.
The already strict PAYE system is being updated further with effect from January 1 next with the introduction of what Revenue calls PAYE modernisation.
Nearly all businesses will have to have an up-to-date payroll software system which is compatible with Revenue’s own systems and which can transfer employee and payment information backwards and forwards between the business and the tax office.
This will result in a high level of control from the tax office.
Care must also be taken with any payments made to workers outside of payroll. From a Revenue perspective, the chief suspects here are travel expenses and mileage allowances.
Again, the key here is control. You must keep records of vouched expenses and any business mileage actually incurred, if you’re paying mileage rates.
However, once all these obligations are met, there is no tax reason why family members should not be employed in the family business or on the family farm.
All individual family members are entitled to use their personal tax credits and bands, as long as there are proper reasons to have them employed and good controls on their earnings.
Brian Keegan is director of public policy and Taxation at Chartered Accountants Ireland