EXPENSES - 16.02.2006

At the end of your first year…

No company bank account

Scenario. Although your accountant advised you that your business should trade via the format of a limited company with you as director, you couldn’t open a company bank account immediately, so initially company income and expenses were made into and from your personal bank account. Can you go ahead and include this income and expenses in your company accounts?

Legal requirement? Contrary to popular belief, there’s actually no formal requirement to open a bank account in the company’s name. It therefore follows that, in theory at least, there’s nothing wrong in the company using the bank account of a director to receive and make payments. However…

Problem. Each time a director receives money due to the company, they are effectively receiving money from the company. And each time they make a payment on behalf of the company, they are effectively introducing funds into the company. This has tax implications for both the company and the director personally.

Tax implications

Director’s loan account. First of all, you need to make sure that the receipts and payments going through your personal bank account are recorded in the company’s books. The easiest way to do this is to regard all money received from customers as a debit to your director’s loan account and all payments made on behalf of the company, e.g. to suppliers, VATman etc. whether by cash or cheque, as credits to this account.

Tip. So the payments can be vouched as valid business expenses, complete an expenses claim form detailing each business item you paid for privately. Attach the corresponding invoices to the back of the form. If you haven’t got an invoice, then attach a copy of the bank or credit card statement with the business item.

Overdrawn? As long as you’ve paid more out privately for the company than you’ve banked, there isn’t a problem. But if there are more customer receipts banked in the personal account than there are company expenses paid for privately, then the director’s loan account may be overdrawn, i.e. the company has effectively loaned you money.

25% tax charge. Not only will you pay tax personally on a benefit-in-kind by reason of having such a loan (if it’s over £5,000), but if the loan account is still overdrawn more than nine months after the company’s year-end, the company will have to pay tax on that balance at a fixed rate of 25% (s.419 Income and Corporation Taxes Act 1988). However, when the loan is repaid, the company can get its money back - but it will have to wait until nine months after the accounting period in which it was repaid.

Putting it right

So, if you find that your loan account is overdrawn when the private transactions have been put through the company; what can you do to avoid the extra tax?

Tip. Make sure that the loan is cleared before the nine-month date. At nine months, no loan means no tax charge. This would most easily be achieved by voting yourself a dividend (assuming you’re a shareholder and there are sufficient profits of course).