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April 4, 2018

Keeping it in the Family: Alan Nicholson v HMRC

In Alan Nicholson v HMRC [2018], the First-Tier Tribunal ruled that a sole trader was unable to include a deduction for his son’s wages on his self-assessment tax return.

There was insufficient evidence to support the sole trader’s claim that his son was paid in line with the hours and rates stipulated, and it was held that as the payments had a “duality of purpose” they could not be included as a deduction.

Had the taxpayer maintained records showing the number of hours worked and how the “wage” payments had been calculated, then it is likely that the payments would have been allowable as a deductible expense.


  • The taxpayer included a deduction on his self-assessment tax return against his self-employment income to account for wages paid to his son who was studying at university.
  • HMRC rejected the expense as there were no records to directly support what payments had been made in respect of the services provided.
  • The issue in point was whether the “wages” were incurred wholly and exclusively for the purpose of the taxpayer’s trade and therefore deductible against self-employment income.

The Case

In order for the deduction to be allowable, it must have been incurred “wholly and exclusively” for the purposes of the trade. Where an expense was not incurred solely for the purpose of the trade, i.e. if the expense had a dual purpose, then the expenditure will be disallowed.

The taxpayer contended that his son had been working for him as a casual labourer. He paid his son by providing him with food and drink and by paying for his home insurance. He stressed that it was his son’s right to be paid what he deserved for the work performed, and that he needed the wages in order to support himself whilst studying at university. Without his son’s help, he would have had to hire somebody else to perform the same duties and therefore the wages (whether cash or in kind) were wholly and exclusively referable to his business.

HMRC stressed that the onus rests with the Appellant to prove that the claimed expenditure was incurred wholly and exclusively for the purpose of the trade. Any expenditure incurred which had a dual purpose is not an allowable expense. The motive behind the payments were not exclusively for the benefit of the trade and it was apparent that personal/private motives (i.e. to support his son through university) played a major part in the decision to make payments.

The Decision

The Tribunal upheld HMRC’s decision and dismissed the appeal.

In arriving at the decision the Tribunal considered the ruling in Dollar v Lyon (H M Inspector of Taxes) [1981] where it was held that where any element of payments was due to “natural paternal love and affection” they would not be deductible

While the taxpayer said the wages were based on work of 15 hours per week at £10 p/h, there was no evidence to suggest that the wages were paid in this manner. Comments made by the taxpayer suggest that the payments were made to subsidise his son’s university expenses and therefore the wholly and exclusively test was not met.

Dollar v Lyon (H M Inspector of Taxes)
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