Accountants warn businesses to stay on top of spending

A leading accountancy firm has warned businesses not to let their personal spending money overlap their business.

Prime Accountants has highlighted that, although the money in both business and personal bank accounts may be held in an individual's name, treating the funds as interchangeable can cause problems further down the line.

It is normal for some business and personal spending to overlap, but issues can arise if the boundaries become too blurred.

The firm highlights the importance for businesses to know that by separating businesses and personal finances, individuals can avoid unnecessary tax risks and ensure there are no inconsistencies.

A main reason mixing personal and business finances are the tax implications it may lead to. For an expense to be VAT deductible, it must be incurred exclusively for the purpose of the business.

Some expenses are likely to serve both personal and business interests, so occasional overlap might not always cause problems.However, where businesses do make VAT claims, they can be harder to evidence if they originate from an account also used for personal expenditure.

For sole traders, the risk is that the money belongs to them, which might mean any drawings from business accounts are treated as profit in the eyes of HMRC.

Similarly, credit to a mixed sole trader account might be misconstrued as turnover, which can push individuals into higher tax brackets.

For limited companies, spending business funds on personal expenses can lead to money being converted into a Director’s Loan Account (DLA).

A DLA needs to be repaid within nine months and one day of a company’s year-end accounting date. If it isn’t, the outstanding balance might incur a 33.75 per cent tax penalty.

If the DLA was tax-free and amounted to more than £10,000 at any point during the tax year, you might need to pay Income Tax on the interest saved.

On top of Income Tax, the limited company would also need to pay Class 1A National Insurance, which is 15 per cent on the cash equivalent value of taxable benefits.

A few mixed transactions here and there might not immediately seem like a bad idea, but it can lead to serious tax issues later on.

Enquiries and compliance checks are becoming more frequent across the UK, as HMRC seeks to fill the estimated £59.2 billion tax gap. Most of these checks are targeted at SMEs, who contribute to the largest share of the tax gap deficit, sitting at 70 per cent.

If HMRC chooses to investigate a business, messy audit trails and mixed finances might make it harder to prove legitimate business costs and deposits.

Kerrie Given, (pictured) associate director at Prime Accountants, recommends that people take a serious look at how they are managing their finances to avoid complications.

She said: “Opening separate accounts, one for personal use and one for your business, can provide clear and auditable records of income and expenditure.

“If you have a track record of mixed spending, it might feel like an uphill battle trying to untangle bank statements.

“By outsourcing this work to one of our accountants, we can go through your accounts and transactions in depth, classifying which relate to your business and which are personal.

“Where costs overlap, our specialists can advise on what is a defensible and reasonable split, so any HMRC enquiries can be answered with a clear rationale.”