Payment of Personal Expenses

I need to know about expenses: I’ve read lots on CUK about expenses but can’t find specific answers or advice around either.

Ques: I’d like to ask about arises because the other day I needed to pay a sizeable sum of cash for my heating/plumbing system at home. It was somewhat of an emergency and needed seeing to – and paying for – immediately. As a result, I had little choice but to pay the contractor who did the repair using my company cheque book. This is obviously not a cost that the company can permanently absorb (even though I do work from home in a home-based office). What do I need to do to make things right? Is it just a case of transferring the amount of money I paid out from my personal account into my company account? I’d appreciate any pointers CUK and its experts can give me.

Ans: From an accounting point of view, this is not a business expense and therefore would have to be shown against the director loan account, which means you need to repay this money from your personal account to the business account as soon as possible. As this is not a reimbursement of expenses paid by the director in relation to the company, and the expense is not in any way related to business, it should not go under P11d expenses reporting.

There are a few other issues: first, you will either have to pay the interest on this loan at the rate HMRC have defined or you may have to show the benefit of interest on the P11d document; either way, you have created somewhat of a paperwork headache for yourself. In the event that your director loan account (including this payment) is not over the £5000 limit (recently this amount has been increased to £10,000), you do not need to worry about the interest element (which, incidentally, would have to be detailed on a P11d).

Secondly, HMRC could get nasty about this situation you have created and treat this distribution as a "wages distribution"; the tax authorities could then demand PAYE tax on this payment. However, personally and professionally, I have never witnessed HMRC being quite so nasty in this regard. Though if the loan remains outstanding more than 9 months after end of year then there is 25% tax charge on director loan account which remains overdrawn.

Thirdly, in the event that you are unable to repay the money within the same tax year, it may be best to treat it as a dividend from the company; that is assuming that the company has the reserves to pay the dividends. If you do this, you will not end up paying any tax providing your total income for that tax year does not jump to the higher income bracket.

One other thing, you mention that you sometimes work from home, so, theoretically, you can claim a proportion of "home expenses" as business-related expenses; for lighting, heating, a proportion of rent, and council tax for example, but this will not include fixing your boiler! HMRC automatically accepts £4 per week/£18 per month as being reasonable for "home working" without the need to produce receipts to justify the claim. You must make sure, however, that you have some sort of "office space", which may only be a desk, some files and a lap-top computer, but in the event, you must be able to prove that you do work from home on occasion.

For further guidance see http://www.hmrc.gov.uk/guidance/480.pdf; and http://www.hmrc.gov.uk/guidance/2010/480.pdf

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.