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Do I need a separate Business Bank Account?

When you first start your business you may be tempted to use your personal account for business transactions rather than a separate business bank account (especially given you might want to save on charges for running separate accounts).

However, you should also be aware that if you are running your business as a limited company, then the company should have its own separate business bank account and you should try very hard to keep business and personal expenditure separate.

And even if you are a sole trader or partnership, as you become more established you should consider the benefits of a separate business bank account.

So what are the benefits of a separate business bank account?

VAT registration is easier

As part of the VAT registration process, HMRC will usually insist your business either has (or is in the process of setting up) its own bank account. If you’re expecting your business to grow and exceed the mandatory VAT threshold (currently £85,000), then you might want to start off on the right foot by having a separate business bank account.

More efficient financial management

If you only have one bank account, your business and personal transactions can easily get muddled - particularly if you don’t record them properly. When HMRC eventually do introduce Making Tax Digital and you want to start using an online bookkeeping software (we’d recommend WAVE), then using this with a separate business bank account may make life far easier.

Better protection against an HMRC enquiry

HMRC’s default position is to assume that any payments from a bank account with mixed business and personal use are likely to be personal in nature and therefore are not tax-deductible business expenses.

Equally if there any receipts into a mixed-use bank account HMRC will assume this is income generated by your business unless you are able to prove otherwise.

HMRC’s advice in their guide is that you should maintain a separate business bank account and if you don’t listen to their advice you could find that their enquiry is a long drawn out tedious affair!

Additionally, if your spouse has been working in the business and you have a joint personal account, then there won’t be any payments made to your spouse. HMRC could therefore argue that there was no payment made and so the cost of employing your spouse would therefore potentially not be tax deductible from your business profits.

As a minimum you should have a separate account to transfer any payments to your spouse – but the simplest thing to do is to make these payments from your business account to his or her personal account!

Tips when using a separate business bank account

  • At the risk of stating the obvious, the easiest way to keep your business records separate is to open an account that is used exclusively for business transactions. Therefore, all business income should be paid into and all business expenses should be paid out of this account. If you use a trading name then set up your bank account in the same name. This way you can avoid HMRC requesting your private bank statements should they open an enquiry.

  • If you need money to fund your personal requirements, make sure a payment is made from your business bank account directly into your personal account to cover these expenses. Make sure any transfers are clearly identified as drawings in your business account. This will make it much easier to identify which expenses relate to your business and are tax deductible and those which are private expenses and not allowable.

Please contact us for further guidance.

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