Tax Credits - is this legal?!

[tessofthedurbervilles]

I know someone who has his own business and pays himself 5k a year. He gets full tax credits and wtc to top him up. He has his mum on his payrole and pays her 12 k even tho she doesn't work for him (she works somewhere else) this is taxed but she gives him all the money so he can pay his mortgage.
He claims it is legal but surely not?!

not if she works somewhere else it isn't.

Tis a common scam though. My friends ex-husband works for his father-in-laws company. Instead of paying him he pays his daughter so he can avoid child support. Nice

Not legal, can it be proven though? ie does the stray cash go into an account with his name on?

I think it is an account he has access to....he couldn't pay his mortage without this money so it must be provable?

If it is a company then she may be an officer (director or company secretary) and be paid for this.
It would be very difficult to prove that she doesn't do something (she could do the books in the evening, be involved in decision making etc - not saying she is, just examples of what you could claim).

It isn'r as black and white as "is it legal or no", it depends on the specific facts of the case.

What she does with her own money is upto her, if she wants to give it to him that is fine. Although there are potential inheritance tax issues.

squirres, it is benefit fraud if she is paying his mortgage or giving him money to pay his mortgage and he has not declared it as income to Tax Credit. It is illegal in this case. I don't see how you can know that he has not declared it though.

(sorry, I mean illegal for him to have the money, not for her to be earning it - any company can pay almost anyone for just about anything if they can justify it!)

sorry - wasn't coming fromm the benefits side. he should be declaring if necessary - do you have to disclose gifted income?
or house could be in her name and she could be paying mortgage.
lots of ifs and buts.

You do for tax credit purposes, possibly not for actual tax/NI but that is a different thing!

He would have to declare gifts over a certain amount to IR , as potentially they could become liable to IHT as part of her estate if she were to die within 7 years.

To purposely underpay yourself so that you are entitled to tax credit is fraud.

Paying someone a wage who doesn't actually work for you but you pay tax on it (depending on the rate of tax - as she has another job) would be hard to prove she didn't do the work.

If though she then decides to give her son money each year - this money is liable for tax - again as you can only gift so much money each year - then you start paying tax on it. Regardless of the death, I do beleive it is around £7000, then tax has to be paid anyhow.

So the same pot of money should really be taxed three times.

you don't pay money on gifts, there are inheritance tax implications, the gifts are potentially exempt transfers, if the giver lives for 7 years after the gift then they are irrelevant. You certainly don't pay any tax at the time of making the gift.
I am fairly certain that you don't declare them either, they just come into play should the gift giver die.

www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/InheritanceTaxEstatesAndTrusts/DG_10010612

The above explains it - she is giving 12k per year - 9k over the limit for IHT and the money is liable for CGT which is set at a higher %

You pay tax on gifts if the gift is over the set amount.

If the tax man was to start look at the business accounts and his mother bank statements then he will be in for a shock.

My hairdresser had major problems with a tax free loan her parents set up for her as the tax man wanted to proove it was a gift for over £3k so he could put in for the CGT in the year.

CGT and IHT are totally different taxes.

As your link explains, any gifts which aren't covered by the exemptions are POTENTIALLY exempt, you don't pay any tax at the time of the gift and they only become relevant upto the death of the giver (if within the specified period).

If you gifted non-cash assets then you may have potential CGT issues. You won't have any CGT issues on sterling cash gifts. And anything which did involved CGT would have annual exemptions, of £9,600.

All this however if slightly outside the remit of the original post, which is about the benefit side - which I did miss originally.

It sounds pretty dodgy to me - and I bet he somehow thinks a tax dodge is less bad than "benefit fraud" - though actually it's both.

just looking at the tax credits site, I can't see that such gifts come under other income, though that is just my reading.
The only point he may fall down on is notional income - Income that you have deprived yourself of to get tax credits or more tax credits.

morally dodgy - yes.
illegal - I'm not sure.

CS, at the end of each year you have to declare your total income for the previous year including (as you do for income support) details of any money given to you or any bills that are being paid by someone else for on your behalf. This would include a mortgage unless it was in her name.

yes, I appreciate that, just from my reading of the information on the tax cerdits web-site I couldn't see what category such income would fall into.
I am certainly not an expert in this area though.