Navigating HMRC Rules: Personal vs Business Spend

Landlords paying personal expenses with company credit cards must watch their spending; otherwise, the tax man may step in.

The warning comes from the First-Tier Tax Tribunal, which heard appeals by Primeur Limited and shareholder James Keighley after HM Revenue and Customs launched an investigation into unallowable expenses he had put through the company accounts and a written-off loan to another company.

During the investigation, which stretched back to 2001, Keighley admitted he was careless about the expenses he charged to the company but was not trying to avoid tax deliberately.

No adjustments were made to the company accounts or Keighley’s tax return for these personal expenses.

HMRC looked at his self-assessment filings from 2001 onwards and decided Keighley had underpaid income tax. A £59,912 penalty was imposed.

Appeals dismissed

Primeur and Valley Dale Properties Ltd (VDP) loans were also investigated. Keighley was a shareholder in both companies, and he, other shareholders and Primeur loaned money to VDP. These loans were written off, and loss relief was claimed.

However, HMRC argued that the firms were connected and that writing off repayment of the £476,000 debt was an unallowable purpose.

Tribunal Judge Nigel Popplewell dismissed the appeals relating to credit card expenses but recalculated the amount of National Insurance and petty cash discrepancies as careless rather than deliberate errors. He also upheld the company’s appeal regarding the loan relationship with VDP.

The tribunal heard Primeur had poor financial control over credit card spending and petty cash, while Keighley’s expenses were not reported on P11D forms. Around half the expenditure on Keighley’s credit card was for personal use.

Although the tribunal was satisfied Primeur and VDP were not connected companies at the time of the loan write-off, the judge found the transaction favoured lenders and deprived Primeur of income, which was not allowable under business or commercial purposes of VDP.

What is unallowable personal spending?

HMRC publishes a comprehensive list of allowable expenses in a Business Income Manual (BIM), which provides general advice for tax inspectors.

Any expense can be claimed, provided it is ‘wholly and exclusively’ for the business.

Spending that fails the wholly and exclusively rule is apportioned pro rata. For example, if a landlord buys a laptop for £500 and uses it for 20 per cent of the time for business, then only £100 is allowed against tax in the business accounts.

The risk is not properly accounting for ‘incidental benefits’. The example usually cited is when an engineer is flown to an exotic overseas location to fix equipment but cannot return home for several days because there are no flights. Even though he had a paid hotel stay and spent time on the beach, the benefit is judged incidental, and the total cost of the trip can be claimed.

A regular claim from landlords is putting bills for entertainment through the business books. Entertaining is a banned expense and cannot be claimed under any circumstances.

Business expenses FAQ

What is a loan relationship?

Loan relationship rules govern lending money for purposes other than a company's business or that can result in a tax advantage.

Read the HMRC loan relationship rules.

Reporting business expenses with a Form P11D

Employers report taxable expenses or benefits employees receive through payroll or with a Form P11D.

What are HMRC discovery assessments?

Discovery assessments are the process HMRC inspectors go through to request information if they believe someone needs to pay the right amount of tax.