Q&A: bookkeeping, bank accounts and allowable expenses

Contributor -

Elaine Clark

A man completed his small business bookkeeping for the month end

Every business must keep accounting records. They may differ in format and complexity, but every self-employed person must produce accounts to complete their tax return, while limited companies must complete accounts according to the Companies Act. Here are the answers to a few frequently asked questions about start up account keeping

Do I need a separate business bank account?

Some small, sole trader businesses and partnerships don't like to open a separate bank account because of the charges, but if you don't have a dedicated bank account for your business, there is much more risk of confusion and your bookkeeping will take longer because there will be more transactions to account for - many of which will be irrelevant to your business.

Banks often give you a good deal when you start up, change banks or keep a minimum balance in the account. Even if there is a cost, this has to be set against the fact it will make your bookkeeping much easier, quicker and cheaper. Many banks also offer benefits that can be helpful to start up businesses when they open an account.

If HM Revenue & Customs investigates your business, you will be giving them access to your personal as well as your business income if you mix everything up in one account. It also means that whoever is preparing your accounts and tax returns will see details of your personal, private spending too.

If you operate as a limited company or limited liability partnership, as these are separate legal entities in the eyes of the law, logically you must open a separate bank account and keep personal finances separate from those of the business (although legislation is silent on this point).

Can I put business and private expenses through my business bank account?

Don't mix private and business expenditure. Your bookkeeping will be quicker and easier if you only put business transactions through your business account.

You will need to take money out for yourself - drawings for a sole trader or partnership; normally salary, dividends and expenses for a limited company - but once a month should be enough.

Paying private costs out of the business can create serious tax problems for a limited company, but even for a sole trader/partnership, you'll only have to pay your bookkeeper or accountant to work their way through your private transactions. And - you may not want them to see how much you spend or what you buy.

Don't be tempted to pay for non-business things out of the business just because that is where the money is and it is convenient.

I have paid for some expenses privately. Can I still put these through the accounts?

If you pay business expenses personally you are, of course, entitled to reclaim them back from the business. Try to avoid this as much as possible by using a debit card on your business account or using a petty cash tin so all payments are made directly.

Where it is unavoidable - and this will particularly apply to limited companies claiming mileage in lieu of motor expenses - take the same approach as if you were claiming expenses from an employer.

Detail the claim on a sheet of paper. Don't forget to attach supporting receipts (and the mileage log if relevant); and file it in the purchase invoice file in the month in which it is paid.

Finally, try to do it at least once every month so you don't forget any costs or lose receipts and miss out on claiming a legitimate expense against tax.

The right accounting software makes it easier to keep track of your expenses and to ensure that you are dealing with them properly. For example, some of the best small business accounting packages offer features like tracking business mileage, or can automatically upload expenses when you take a photo of the receipt.


What if I've used my personal credit card for business expenses?

It is often easier to use a debit card linked to your business account because you should not be using a credit card as a source of finance. If you are using a credit card for business expenses, try and use it exclusively for the business (don't put private expenditure on it) and pay it off in full at the end of every month.

You will need to analyse the amounts spent on the credit card across the business expense items (eg VAT, travel, motor expenses, etc), because credit card transactions will often fall into different categories.

Sometimes credit card companies will summarise expenditure into different categories, but this is not usually very helpful as their analysis is unlikely to use the same categorization as you would use for the business.

Some of my costs are part business, part private. What should I do?

This often causes confusion, but you can simply look at it as your private expenditure and make an expense claim for the business part in the way described above. If you run your own business as a limited company this may be the best way, because paying private costs from the company can cause tax problems.

You will need to have a sensible method of assessing how much the "business part" is. A common example is the cost of running your business from home. You will need to calculate how much your house costs in total and then make a reasonable estimate of the proportion of property used for the business and apply that proportion to the total costs.

It is important to realise that this is just a method of finding out what the business cost is. If necessary, you should be able to explain why it is 10% or 20% of the total rather than, say 5%.

What costs can I claim for?

For a cost to be allowable, it must be incurred for the "sole purpose of the business". You cannot claim for personal expenses (eg suits or general clothing). Obviously, you can claim for the cost of the goods you have acquired to make your sales. For example, taxi drivers, minicab drivers, etc and those in the road haulage industry can claim fuel costs as an expense rather than elsewhere (unless they are claiming mileage rate); hairdressers should enter shampoo and hair product costs as an expense.

At the end of the year you will need to make an adjustment for the stock you have left. So the value for cost of sales will be: the value of opening stock brought forward from last year, plus purchases made during the year; less value of closing stock at the end of the year.

Other direct costs might include: discounts; commissions; carriage; and research costs. For permanent, temporary and casual employees you should include: salaries/wages; bonuses; pension contributions; benefits; employer's NICs (National Insurance contributions); canteen expenses; any recruitment agency fees; any subcontract labour costs.

Allowable premises costs include rent; business rates; water rates; light; heat, power; property insurance; security; use of your home as an office; as well as repairs and renewals and general maintenance of premises and maintenance of machinery.

You can also claim for general admin expenses, such as telephone; broadband; postage/courier; stationery; printing costs; professional journals and subscriptions; insurance (eg public liability, etc). Travel and subsistence costs are also allowable, including vehicle insurance; servicing; repairs; vehicle licence; fuel (or mileage claimed at approved rates); rail/air tickets; taxi fares; hotel accommodation; subsistence/similar costs.

Advertising, marketing and promotional costs can be classed as expenses, as can fees you pay to an accountant, solicitor, surveyor, architect, stock taker, etc. You can also claim back interest and alternative finance payments on bank and other loans (including overdrafts) and alternative finance arrangements, as well as bank/credit card charges and interest charges on hire purchase agreements.

Written by Elaine Clark of CheapAccounting.co.uk.

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