There are lots of ‘rules’ of business but something we frequently see is personal spend from business accounts; so why is it such a problem? After all it’s my money? Isn’t it?
So, lets have some background to put some context into the problem. It’s very easy to see the money in your business as your own, for Sole Traders that is almost true but you should still keep in mind that business and personal income & expenditure have differing tax rules; unless you have very few business transactions each year it is very easy to forget what each item of income or expense actually was.
We have all heard the ‘Pub legal advice’ dished out to self employed people about how ‘they’ would put everything through the business and let their accountant ‘sort it out’; depending on what service you pay for, an accountant will potentially separate your transactions and correctly assess the tax due for business and personal affairs. However occasional people choose to cut corners and either ask an accountant to submit an end of year return, which essentially is only using the figures the client has supplied or, even worse, submit their own tax return.
Unless you are running a very small business you should hold a business bank account and run all of your business transactions through there, if you’re a business which is heavily cash orientated you should keep your business cash separate from your personal money. Personal expenditure should not be made from your business bank account at all, good practice is to draw money regularly as ‘wages’ and put this directly into your personal bank account; it is so much easier to explain this method should you ever have too!
Generally you can claim something as a business expense if it is wholly and exclusively for the use of your business; anything that isn’t you should be taking advice before you claim it, as accountants we will always try and reduce your tax burden where legally possible.
Partnerships are vastly similar to self employed albeit with two (or more) people as the owners, we don’t see many partnerships anymore and it is something that started to disappear after it was made much easier to operate and run Limited Companies.
Things really change with Limited Companies and how you treat business expenses, you should treat any Company as an entity in its own right; you might be the sole Director and only employee, but you technically work ‘for’ the company. Limited companies should have bank accounts in their own right, not in the names of Directors; all banks will insist on this and should it be found that you are running a business through a personal account don’t be surprised if your bank closed it.
Expenses paid by Limited Companies must only be for the genuine purpose of its business or trade, as a Director you are entitled to pay yourself wages and claim expenses just like any other employee; but you must ensure that they are either for genuine business reasons or such things as sustenance or overnight accommodation is claimed in accordance with tax legislation. As accountants we often challenge clients to explain the nature of the expense where it isn’t in the normal day to day business of the company, in most cases clients come back very quickly and give reasons behind them; occasionally we’ve had some difficulty, the reason we do this is quite simple – we are on your side. The next person to challenge your company spending might be a tax inspector and if you can’t answer it or you seem to be simply ‘making it up’ then I think we all know what is going to happen.
Our simple rules for business spending are-
- Never spend money from business accounts for personal reasons.
- Submit weekly or monthly ‘claims’ for sustenance, travel and other indirect expenses.
- Pay yourself a regular ‘wage’ and show this transaction in your accounts.
- Never use a personal bank account for business purposes.
- Consider the use of a business credit or charge card for frequent small transactions.
This isn’t an exhaustive list and every business is different, please contact us with your specific enquiry and we’ll do our best to help. More importantly don’t take advice from unqualified people, after all they won’t be the person under investigation if they are wrong!