Small businesses in the UK could be putting themselves at risk by failing to separate business and personal banking activities.
The advice from
is that neglecting to separate these two types of account can cause considerable problems for sole traders, partnerships and fledgling firms. Here are five reasons why business and personal banking should never be mixed.
Less scrupulous proprietors might regard this as an advantage, but combined personal and business banking can cause chaos when annual tax reports are due to be submitted to HM Revenue & Customs (HMRC).
Sole traders often use their personal bank accounts for business transactions, especially when starting up. This is because few proprietors want to commit to a business bank account before a venture shows signs of succeeding.
By the time success does arrive, however, business transactions may be difficult to differentiate from personal transactions. Unless the proprietor maintains an impeccably detailed set of books, some business transactions will almost certainly be overlooked when a tax return is completed.
While causing more work for proprietors, mixing business and personal transactions could result in a fine from HMRC, which demands that business owners take reasonable care when preparing their tax returns. If incorrect accounts are submitted, the careless proprietor could be fined up to 30 per cent of tax due.
One of the main reasons why small firms incorporate is to improve their image. Limited liability companies tend to appear more professional than sole traders, which is why some customers look askance when they are asked to write out a cheque to the proprietor's personal bank account. If nothing else, separating business and personal banking improves the professional image of a small firm or sole trader.
Loans and Incentives
Though banks are not the most generous lenders these days, they do still provide small firms with low-interest loans, manageable overdrafts and other special rates and services. Failing to separate business and personal banking can prevent firms from accessing the best deals and financial products.
If businesses aim to avoid problems with HMRC, they should ensure that their books are balanced. Firms must also retain all receipts and invoices for a number of years (usually at least five) in case HMRC investigates their business activities.
HMRC audits are a notoriously daunting experience for small business owners, but those who maintain an effective system of accounting should have little cause for concern. Those who have not yet separated their business and personal banking, however, might leave an audit trail that is extremely hard to follow. No proprietor should aim to upset or inconvenience HMRC auditors.
Payment Options and Terms
Personal bank accounts are unlikely to be able to accept all methods of payment. Though cheques and cash pose little difficulty, credit and debit card payments require more advanced facilities.
Additionally, many personal bank accounts exclude business activities in their terms and conditions. In short, all businesses should set up a business bank account as a matter of priority.