BIM37737 - Wholly and exclusively: duality of, or non-trade, purpose: remuneration, etc: whether payments to minor children were allowable remuneration

S34 Income Tax (Trading and Other Income) Act 2005, S54 Corporation Tax Act 2009

Given a choice of explanations, prefer the one that involves no illegality

It is illegal to employ underage children. This is a factor which the courts held proper for the Commissioners to take into account when deciding not to allow deductions for wages claimed to have been paid to children in the case of Dollar v Lyon [1981] 54 TC 459.

Ian James Dollar and his wife Janice ran a farm in partnership. The Dollars had difficulties in obtaining labour. Their children (aged 14, 11, 9 and 7 years) had been brought up to help on the farm. The children were paid £2 a week each by their parents, who also bought them each £250 worth of National Savings Certificates. Mr Dollar gave evidence to the effect that that the total of approximately £354 per year for each child represented the minimum wage provided for by the Agricultural Wages Act for 15 hours' work per week - two hours each weekday and five on Saturday - and that those were the hours worked by each child. The taxpayers sought to deduct the payments to the children as expenses in computing their profits.

Before the General Commissioners, the Inspector of Taxes contended that the payments were in respect of the natural love and affection the parents held for the children and the payments should also be disallowed as it was illegal to employ anyone under the age of 14 by reason of the Children and Young Persons Act 1933.

The Commissioners stated in their decision that they had taken into consideration the Act of 1933 and the ages of the children. The Commissioners decided that (apart from the cash payment of £104 to the eldest child) the payments were not deductible being in the nature of pocket money.

Vinelott J dismissed the taxpayers' appeal. The judge explained that, whilst the payments to the minor children may have been illegal, that did not mean that they were thereby disallowable. If the payments were genuinely made as remuneration then they could be deducted notwithstanding any illegality. But, if the payments were made to the children out of natural parental love and affection then they were not deductible. When faced with a conflicting choice as to purpose the Commissioners should choose the innocent explanation over that which involved doing something illegal.

The question of whether the payments had been made wholly and exclusively for the purposes of the taxpayers' trade was one of fact. There was evidence before the Commissioners upon which they could have reached their decision.

You should note in particular the Judge’s reference to:

• the amount paid to each child was the same
• the amount of the payments was commensurate with pocket money
• given the family circumstances, there was nothing surprising in finding healthy young children working on the farm in return for pocket money
• the idea that a child of eight entered into a contract of employment is a strange and unconvincing one
• it was open to the taxpayers to ask their children to work on the farm without paying them wages in accordance with the Agricultural Wages Act

The sections of Vinelott J’s judgment on which the above guidance is based are set out below (see page 462):

It should be noted that while the General Commissioners said that they took the provisions of the Children and Young Persons Act 1933 into consideration they did not decide the appeal on the ground that the employment of the three younger children would have been illegal. In that I think they were right, for clearly a contract of employment of a child is not rendered unenforceable by the child on the ground that the employment is illegal. But the fact that the employment of the younger children in the proper sense of the word ‘employment’ would have been illegal was equally clearly a matter which the General Commissioners were entitled to take into account, since if two explanations of a given state of affairs is possible, one of which involves the doing of something illegal and the other not, the innocent explanation is in general to be preferred…

The question whether the payments made by Mr and Mrs Dollar were wages and so were money wholly and exclusively laid out or expended for the purposes of their farming business is a pure question of fact. It is to my mind clear that there was evidence before the Commissioners on which they could have reached the conclusion that they in fact reached. It is noteworthy that all the children, whose ages were between eight and 14 were paid the same and for the same amount of work, and were paid a weekly sum in cash which was not out of the way as pocket-money. Given the family circumstances, there is to my mind nothing surprising in finding healthy young children working on a family farm and getting in return pocket-money on a generous scale and from time to time a present of National Savings Certificates out of the profits of the farm without being in any sense employed or contractually entitled to any payment. Mr Dollar, who appeared in person, told me that he regarded himself as contractually bound to pay the children in accordance with the minimum wages prescribed by the Agricultural Wages Act, and that in his view, if he had failed to pay them, the children could have sued him in the County Court. I find the idea that a child of eight entered into a contract of employment in this way a strange and unconvincing one. Equally, it seems to me that it was open to Mr Dollar to ask his children to work on the farm without paying them wages in accordance with the Agricultural Wages Act. But, in any event, Mr and Mrs Dollar did not give this evidence before the General Commissioners and it would not be right for me to allow further evidence at this stage supplementing the facts found by the Commissioners. Nor is there any ground for referring this matter back to the Commissioners for further findings of fact. This evidence should have been given, if at all, at the hearing before them.

For a discussion of whether the wages of a spouse or civil partner are an allowable deduction from profits of a trade, see BIM37735.