A degree in tax saving?
Funding a student through university is an expensive undertaking. Where the student's family owns a business it may be tempting to employ the student in the business during holiday periods, and pay them a scholarship while they attend university. This can be a risky strategy for the parent.
There is a tax exemption for scholarship income which applies up to a cap per academic year (currently £15,480). However, that doesn't prevent the scholarship income paid to the children being taxed as an employment benefit on the parent.
This was the trap Mr Kutcha fell into. His business paid scholarships to his two sons and applied the tax exemption. However, the taxman proved in court that the scholarships for his sons were provided because of his employment (not the sons' employment). As a result the company had to pay Class 1A NICs on the scholarship amounts, and Kutcha senior was taxed personally on the amounts paid tax-free to his sons.
It is possible for a business to set up a formal scholarship scheme, under which no more than 25% of the scholarships funded are linked to employees' employment within the business. Scholarships can also be paid to remoter relatives such as nieces or nephews who are not in the definition of 'family', as long as those remoter relatives are not also members of the employee's household. But HMRC may still argue about the reason for paying the grant.
In short, trying to be too clever may put you bottom of the class. We can help you get the answer right.
