Where personal spending and business spending overlap, financial tracking can unnecessarily become a headache.
A few transactions here and there might not seem like a huge deal at first, but the blurring of the lines between business and personal spending can cause serious financial problems.
By effectively keeping your personal and business money separate, you can minimise tax risks and ensure there are no inconsistencies that might raise eyebrows with HMRC.
Why is it important to separate finances for tax purposes?
One of the main reasons it is so important not to mix personal and business accounts is the tax implications.
If a cost is to be deductible, it must be incurred wholly and exclusively for the purpose of the business.
While some overlap isn’t a problem, as it is likely some costs serve both business and personal purposes, claims are harder to evidence when every transaction comes from the same account.
For limited companies, spending business funds for personal expenses can result in the money becoming classified as a loan to you, known as a Director’s Loan Account (DLA).
Where this loan isn’t repaid within nine months and one day of a company’s year-end accounting date, you could be faced with a steep 33.75 per cent tax penalty on the outstanding balance.
Likewise, if the loan was to exceed £10,000 at any point in the tax year and is interest free, you must pay Income Tax on the interest saved and the company must pay Class 1A National Insurance.
For sole traders, the risk is that the money is genuinely theirs, which means any drawings from a business are seen the same as profit.
Any credit to a mixed sole trader account might be misconstrued by HMRC as turnover, which can push individuals into higher tax brackets.
How can compliance be impacted by mixed spending?
Enquiries and compliance checks are rising sharply across the UK, as HMRC aims to plug the estimated £59.2 billion tax gap.
These checks are being targeted at smaller businesses, who form the largest component share of the tax gap deficit, at 62 per cent.
When a business receives an enquiry letter, they only have 30 days to respond from the date printed.
Having messy audit trails can make it hard to prove legitimate business costs and deposits into a mixed account, leaving you scrambling to provide evidence in the timeframe.
While mixed spending doesn’t imply wrongdoing, it might make it harder for individuals to prove expenses were wholly for their business and unexpected income isn’t suppressed profit.
How can an accountant help organise finances?
Having clear pots of money, one for personal and one for business finance, provides clear and auditable records that can protect you from increased scrutiny and tax complications.
It is understandable for businesses who mix their personal and business finances to feel overwhelmed when trying to fix the problem.
What might initially feel a bit like David and Goliath can soon feel more manageable after talking to one of our accountants.
We can take a deep dive into your accounts to work through transactions, classifying which are for your business and which are personal.
For overlapping costs, our experts can help advise on what is a defensible split with a reasonable rationale, demonstrating to HMRC that it isn’t just guesswork.
With the move towards quarterly reporting for Making Tax Digital (MTD) for Income Tax, we can keep your income and expenses accurate so you never miss a deadline.
Reach out to one of our accountants today to decouple your personal and business finances.
