How NOT To Pay For Your Christmas Gifts21st December 2016
It’s that time of year again, when business owners start thinking about their tax returns – and this is when we start to notice strange things popping up in their accounts.
Over the years, I’ve seen it all. I’ve seen people charging their mortgage to their business who are flabbergasted when I tell them it was taxable income. Perhaps the best effort was a client who put his au pair on the payroll. It took some time to work out because her name was just one among many employees, but I got there in the end.
The thing is…
Many business owners dip into business funds in order to pay for personal things. This phenomenon is particularly noticeable around Christmas, when people need a bit of extra cash to get them through the festive season.
And that can be dangerous.
HMRC hates this behaviour because it’s an attempt to get money tax-free.
If you decide to pay for personal items through the business you have two choices: Pay it back really quickly or be prepared to pay tax on it.
Most people know when they are wrong to charge personal items to the business, and are consciously trying to bend the rules to see how far they get. We often get asked some variation of “What can I get away with charging to the business?”
Others make an honest mistake. The rules can be complex, and people are not always aware of some of the finer points.
But that’s your responsibility. You really need to be clear about the rules – and if you’re not then you need to check. And most importantly of all, don’t push your luck and hope HMRC fails to notice.
Even within the past two years, they are taking this much more seriously. If they discover you have been taking money out of the business for personal purposes, they can charge penalties and levy punitive interest.
Even if they don’t notice, don’t do it. Taking money out of the business to fund personal expenses is a terrible, unprofessional way to run your company. You are depriving it of funds it needs to function, thrive and grow.
Even if you’ve founded the business and consider it ‘yours’, look at it as an entirely separate entity – not an extension of your personal world. Your neighbour has no responsibility to pay your mortgage or shell out for your Christmas presents – neither does your business!
There are areas where the lines might blur, but stick to this general rule of thumb: If you didn’t have the business, would you have paid that expense anyway? If the answer is ‘yes’ – for example, you would have met that friend for coffee regardless – don’t charge it.
Ultimately, claim for what you can. You should ever be out of pocket for expenses that are genuinely business-related. So, if you travelled by car to a business meeting, claim that mileage even if it was only a little. It all adds up.
But make sure you are honest and transparent about what you’re charging to the business. It’ll save you a lot of hassle in the long-run.