When in business, best practice is not to have a bank account which contains a mix of trading income and private income. Why you may ask?
We have dealt with HMRC enquiries into the tax affairs of many clients. Clients who are business owners and have a bank account which is used for both business and personal purposes (and in some cases just personal account(s), in the event of an enquiry the bank statements would be requested together with any evidence to support where unidentified, untaxed income has come from
The amount(s) discovered may have been legitimately received from non-business sources, i.e gifts or loan(s) from friends or family during the tax year of enquiry. If you are unable to show to the complete satisfaction of HMRC that these amounts are something other than untaxed, undeclared business income, the end result on those amounts not proven could be as follow, tax payable, possible class 4 National Insurance, interest, and penalties. Worse still, HMRC may assume that the same circumstances arose in earlier and subsequent years which have already been reported. They can then raise assessments for tax etc. An example of this is shown below:
HMRC opened an enquiry into a taxpayer’s tax return for 2009/2010. The taxpayer had moved from Ghana to the UK, with family members still living in Ghana and two brothers living in London. A bank account existed in the name of one brother, the taxpayer had been granted access to the account for his business income. HMRC determined that this bank account was a business account and that cash receipts of £6,740 and bank deposits of £14,160 paid in during 2009/2010 were undisclosed taxable earnings
The tax payer advised the Inland Revenue that the £6,740 had been deposited by members of his family in order to support him whilst in the UK. His mother, a teacher, had set up a school in Ghana to which he had contributed £21,000 towards the cost of setting it up. Additionally a friend of his wife’s made a loan of £14,160 to help toward the contribution he had made for the school and had been deposited in the bank account, his father subsequently agreed to repay the loan.
A tribunal concluded that the tax payer had demonstrated that the monies paid into the bank account in 2009/2010 were not undeclared taxable earnings. It was also their view that the other years could only be assessed on the ‘presumption of continuity’, if there had been a pattern of conditions established. In this case the tribunal were unable to see any such predictable patterns
NOTE: It is prudent to keep records and documentary evidence supporting the source and nature of any non-business income, reducing the possibility of HMRC attempting to argue that the receipts signify undeclared business income, possibly seeking to charge additional tax , interest and penalties
We have considerable experience in all areas of taxation and businesss services, including providing a very cost-effective payroll bureau service.
Contact 01925 413210
