When you are an established limited company, buying personal items from company profits can be a tricky situation.
In the grand scheme of things, the only personal items that you buy through your limited company should be for the purposes of running the company only. Personal expenses are not eligible business expenses and are not deductible against taxable income.
Technically, you can buy personal items, just not as a business expense, but in all honesty you are better off not doing this at all.
Let’s explore this often asked question a bit further.
Can I buy personal stuff with my business account?
It can be very alluring indeed to get out the business bank card when you find that limited company accounts are running low on funds. But even if you use company accounts or a business bank account for everyday use, this becomes a financial and accounting nightmare when the time comes to claim expenses and sort it all out.
Regardless of whether you use an accountant or accounting software, using company funds not in the purview of business finances causes chaos when trying to sort out allowable expenses vs. other business expenses and is often not worth the headache.
But there are a few exceptions worth noting.
What’s acceptable and what isn’t for business purposes?
For example, the tax authorities tend to be suspicious of payments made to family members, including benefits in kind. This include things such as company cars and pension contributions.
In all cases, to obtain a tax deduction for these types of transactions, the business would need to show that the family member was actually working for the business, and that they gave equivalent value for the payments received.
If, however, the trip got extended to allow the individual to take a holiday, then this trip would no longer be considered wholly and exclusively for business purposes, so the costs would be disallowed.
Where the individual travelled by first-class train or air, while it might be possible to argue that the business did not require them to travel first, and that economy would have been acceptable, this is not a point that is often raised by HMRC.
Income tax, capital allowances, and corporation tax
In the case of corporation tax, there is a specific ban to claim tax relief for entertaining expenditure, so any restaurant bills paid with a business account which relate to meals taken with customers / suppliers / contacts would be disallowed. They can still be claimed as an expense but there wont be any Corporation Tax relief on it
This includes the element that relates to the proprietor or employee. Claiming that they would have been able to charge, had they eaten alone, isn’t sufficient as this again breaches the “wholly and exclusively” rule.
Note that the rule about whether this would be taxable on the employee is quite distinct, and it is rare for an employee to be taxed on the benefit of entertaining clients, so this solely relates to a business owner or using company accounts.
Personal finances vs. business spending should always be kept separate as to discern exactly what is a taxable profit, fixed asset, and your own money.
Can I buy anything through my business?
As a limited company, there are some things by which you can use business funds through a business account that are indeed not a bad business idea.
For example, the tax rules have relaxed over the last few years to allow limited companies and even small businesses who are based at home to claim a reasonable proportion of their household expenses (including in some cases mortgage interest) against the business.
What is claimed for tax purposes will depend on the space made available to the limited company, and the number of hours it is made available and actually in use, but this can be fairly generous.
But, there may be capital gains tax implications if space in your home is used exclusively for business purposes.
The same treatment would not apply to a company, as the household expenses are incurred by the individual homeowner and not the company.
Since all of these purchase types are related to taxation, determining what is and is not tax deductible is something to keep in mind, all of which should be recorded on a balance sheet.
What passes as an acceptable business expense?
- Use of a pool car
- Use of a mobile app on a telephone – one mobile phone only per employee where provided
- The provision of representative accommodation (except for certain directors)
- Approved share incentive plans
Can I take money out of my business bank account for personal use?
The important thing to remember if you have a limited company is that ‘you’ are not the company, and therefore, taking money out of the business account for personal use is not advisable.
The only time you should do this is when you pay yourself a salary. You will need to make sure this payment has the appropriate tax and National Insurance deductions taken out, and the cost is always recorded on a balance sheet or through your online accounting software.
This can also come in the form of dividends if you must pay corporation tax.
If you ever withdraw money from your company accounts, make sure you pay back the same amount as soon as possible since this will then constitute a payment in the eyes of HMRC, which means you will have to reconcile all of these expense claims come tax time or this could cost you money!
Is buying personal items through business accounts illegal?
Buying items for personal matters is not exactly illegal, but it could be down the road if the expense is not paid back into the proper accounts.
In terms of legalities, you will need to make sure your company is a registered office, VAT registered, and has an applicable company number.
But buying items for yourself from company money is not illegal, granted you provide full disclosure of this to HMRC.
Do I need to pay tax on business expenses for a limited company?
Yes. But this can all be reclaimed through HMRC as a deduction.
Here are some common items that are warranted:
- Office equipment including computer hardware and certain types of software, and office furniture
- Parts of a building referred to as integral features
- Certain fixtures, such as air conditioning, fitted kitchens, or bathroom fittings
- Lorries or vans used for moving purposes
- Machines used for company purposes
- Agricultural machinery including tractors
- Machines used for providing entertainment, such as arcade game machines
The big thing that needs to be established in terms of claiming items as an expense, is to determine how you are using the items or equipment on a daily basis.
For example, is your work PC part of your limited company’s overall office equipment solely or, do you also use the computer regularly for personal circumstances?
Additionally, you will need to make sure that the computer or laptop is insured properly. Even if an organisation isn’t responsible for insuring its building, it will need to insure the contents inside – such as computers, technical equipment and stock.
There is also the VAT element to be aware of concerning your limited company. If your company is VAT registered, items purchased are treated as a single transaction in addition to a working need.
This means that under the flat rate VAT scheme, you can reclaim the VAT on your purchased items as long as the full amount is at least the value of £2,000. For standard rate schemes, there is no minimum amount – in fact you can claim even if the VAT cost on the asset is as little as just £1.
How CloudCo Chartered Management Accountants can assist you
Running a business is already hard enough. Our accountants and bookkeepers deliver client-focused accounting and bookkeeping services aimed specifically at reducing your workload to put more money in your pocket.
Among many other benefits, we provide essential and easy-to-read financial reports that show you the overall profitability of your small business.
The services of an accountant or bookkeeper take some of the most difficult and arduous tasks of managing a company off the shoulders of the owner.
Furthermore, our professional bookkeepers and accountants can expertly handle the financial affairs of your limited company, relieving you of possible errors, helping to grow your profits, and allowing you to take full advantage of our expertise.
The many years of experience that add up to gold-standard bookkeeping and accounting services of CloudCo will ensure 100% compliance and an accurate set of accounts and tax return details at the end of every financial year.
Contact us today for a free accounting consultation and allow our team to help guide you through personal vs. company expenses.
