![]() If you had a personal reason for incurring the expense, even if you also had a business reason for it, then the expense would be disallowed in its entirety - unless it could be accurately split between part that was for business and part for private.įor example, buying ordinary clothes will nearly always fail the dual purpose test and have to go to Drawings, because you can't distinguish between the business and private part of this expense. If you spend money on something that's for mixed business and private use, then unless you can accurately identify part of it that's just for business and part that's private, you can't put any of the cost through your business accounts. There are some areas where you have to be careful. What business expenses don't count as "wholly and exclusively"? So make sure you explain your costs correctly in your books. "You should be able to show clearly what you have spent personally and what you have spent on business." HMRC's recently enhanced penalty regime means they can come down hard on any businesses who haven't kept full and accurate records, which includes keeping track of what costs count as business and which ones as private. In FreeAgent, you'll find them at the bottom of your balance sheet. That includes not only private expenses, but also any regular wage-like sums that you take out (sole traders and partners aren't employees, so can't go on the payroll and be paid a wage).Īnd it also includes any money you pay into a pension.ĭrawings are kept out of your business's profit and loss account so that you don't claim tax relief on them by mistake. ![]() When you're a sole trader or partner, you've got to put any money you take out of your business account as Drawings. In FreeAgent, that means you explain the payments as Money Paid to User > Drawings. If you do spend any money from your business account for private expenses, like your weekly food bill from the Co-op (a bit more realistic than a private jet!), you must explain that as Drawings in your accounts. How do I deal with private expenses in my accounts? This is because you're not entitled to reduce your tax bill for any private expenses. So if you do buy that private jet, and you use it 50% for business, you can put 50% of the costs of running the jet through the business's accounts.īut the other 50% is private expenses and must be kept out of the business's accounts - or alternatively, if you put it in, you must add it back as "disallowable" expenses when you do your tax return. So what's the issue then?įor a sole trader or partner, the main issue is that your business's accounts mustn't contain any expenses that aren't "wholly and exclusively" for the business's trade. Or, of course, if you take so much out that you can't pay the business's dues and it subsequently goes down the tubes. They will only get upset if you then put that private jet through the business's accounts and try and claim tax relief on it. ![]() You can buy yourself a private jet, take that money from the business bank account and HMRC won't turn a hair. Employees and directors are subject to restrictions as to how much, and how, they can be paid. That's completely different from employees (which includes directors of a limited company). When you're a sole trader or a partner, you can take out as much cash as you like from the business account and HMRC won't come after you. This has ramifications about what can happen if, heaven forbid, your business goes down the tubes.īecause legally you are the business, there are no tax implications of money you take out of, or put into, the business. When you're a sole trader or a partner, there's no legal difference between you and your business. That means business expenses that you pay for on a personal credit card or using cash out of your own back pocket, that you’d like your business to pay you back for. Here's a quick look at some of the issues relating to out-of-pocket expenses. There are a lot of guides out there about expenses you can claim if you're an employee.īut what if you're a sole trader or a partner in a partnership, and therefore self-employed, not an employee? ![]()
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