It is normal for some business and personal spending to overlap, but problems can arise if the lines become too blurred.
While a few mixed transactions now and then might not seem like a bad idea at first, it can lead to serious financial problems down the line.
Keeping your personal and business finances apart can minimise unnecessary tax risks and ensure there are no inconsistencies that might raise eyebrows with HMRC.
What tax problems can mixed finances cause?
A core reason not to mix personal and business accounts is the adverse tax implications.
For an expense to be VAT deductible, it must be incurred wholly and exclusively for the purpose of the business.
As it is likely some costs serve both business and personal purposes, some spending overlap might not always be a problem.
However, it can make claims 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, known as a Director’s Loan Account (DLA).
If this loan isn’t repaid within nine months and one day of a company’s year-end accounting date, you could be hit with a 33.75 per cent tax penalty on the outstanding balance.
Where this loan was tax-free and more than £10,000 at any point during the tax year, you would need to pay Income Tax on the interest saved.
In this scenario, 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.
For sole traders, the risk is that the money belongs to them, which might mean any drawings from business accounts are treated as profit.
This could also lead to any credit to a mixed sole trader account being misconstrued as turnover, which can push individuals into higher tax brackets.
What are some compliance risks with mixed finances?
Enquiries and compliance checks are becoming more frequent across the UK, as HMRC seeks to fill the estimated £59.2 billion tax gap.
These checks are predominantly being targeted at SMEs who form the largest share of the tax gap deficit at 62 per cent.
When a business is notified of an enquiry by post, they are only given 30 days to respond from the date printed.
Having messy audit trails can make it harder for SMEs to prove legitimate business costs and deposits when mixing finances.
As the timescale to respond is a mere 30 days, it can leave you scrambling to provide evidence by the deadline.
While mixed spending doesn’t imply wrongdoing, it may make it harder for individuals to prove expenses were business-related and unexpected income isn’t hidden profit.
How can an accountant streamline finances?
By having separate accounts, one for personal use and one for your business, you can provide clear and auditable records.
Organised financial tracking can protect you from increased scrutiny and future tax complications.
What might initially feel like a Sisyphean task can become a lot more manageable after speaking 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.
As the Government has moved towards quarterly reporting with Making Tax Digital (MTD) for Income Tax, we can keep your books tidy so you never miss a deadline.
Speak to one of our experts today for help with organising your personal and business finances.
