Family Companies and Benefits in Kind - Tax Tribunal Guidance

When it comes to Income Tax, almost nothing is more controversial than benefits in kind. The Chancellor's recent announcement on restrictions on 'salary sacrifice' illustrates the Government's hostile attitude towards tax planning that takes advantage of PAYE loopholes or routing expenses through a company, as was the issue in a recent case concerning a frail and elderly woman whose care home fees were paid by a family company.

Both the woman's husband and daughter worked for the company. She had not lived with the former for many years although they were not divorced. HM Revenue and Customs (HMRC) took the unchallengeable view that the payment of the fees was a benefit in kind, but considered that the daughter (not the woman's husband) was liable to pay the tax on the benefit, on the basis that it was she who had contracted personally with the care home.

In upholding the daughter's challenge to that decision, the First-tier Tribunal found that she had dealt with the care home as the company's agent. Both she and the husband were potentially liable to pay tax in respect of the fees in that they were paid for the benefit of a family member. However, HMRC were not entitled to pick and choose between them and the hierarchy contained in Section 701 of the Income Tax (Earnings and Pensions) Act 2003 meant that it was the husband, not the daughter, who was obliged to pay tax on the benefit in kind.