drawing cash out of business / personbal account

martinsutton

My wife and i rent out two houses and have now set up a small hire business which takes cash on a weekly basis.
My wife who runs this is classed as self employed and pays NIC.
All the money for these activities is declared legally and honestly through our tax returns.
The business and the houses to rent were set up using our own cash put into the account - not as a loan - it was just deposited.
Obviously any profit made on this is taxable through the tax return.

The question is:
When we get paid cash for a hire, can we account for the cash by way of receipt into the account without actually paying it in?
I can see this being viewed as salary - but i think we should only be paid on the actual profit declared in the tax return.
This 'cash' would still be declared on the tax return via the accounts for the business. We also draw money out of the account - this is basically there because we put the cash in the account in the first place. I can't see a difference between not paying it in and using it or paying it in, but drawing it back out.
I appreciate it would be easier if we had originally set up a business account but it is a personal account used for business????

Pennywise

Assuming the businesses are operated as sole traders or partnerships (not limited companies), then what you draw out is completely irrelevant for tax purposes. Your taxable profits are taxable income less tax-allowable expenses. Private monies introduced and drawings are neither so are completely ignored in your self assessment tax return.

martinsutton

Pennywise wrote: »

Assuming the businesses are operated as sole traders or partnerships (not limited companies), then what you draw out is completely irrelevant for tax purposes. Your taxable profits are taxable income less tax-allowable expenses. Private monies introduced and drawings are neither so are completely ignored in your self assessment tax return.

this is exactly what i think - but the idea of someone giving me £50 cash for a hire and me putting it in my back pocket seems very strange! - Even though it would be declared legally on the tax return and then taxed if required.
thanks

fengirl_2

If it goes through the bank before you draw it out and spend it, you are providing more of an audit trail, especially if you give the client an invoice/receipt. See other threads regarding tax investigations - as soon as HMRC are able to establish that there is cash floating about, they can argue that any amount of cash does not go into the bank and is not recorded anywhere.

tyllwyd

martinsutton wrote: »

this is exactly what i think - but the idea of someone giving me £50 cash for a hire and me putting it in my back pocket seems very strange! - Even though it would be declared legally on the tax return and then taxed if required.
thanks

You also have to be careful to keep clear in your mind that the £50 has not been taxed at that point. So if you are given a £50 note, and you carefully record it in your books and go out and spend that £50, you have actually spent more than you earned, because you should have deducted the tax & expenses from that money.

martinsutton

thanks fengirl -
the hire is recorded quite well as we issue a disclaimer that is signed by us and them and we both have a copy, we also log everything for bookings so we don't make any mistakes. Our insurance is invalid if we don't do this.
We do it all honestly - it just seems pointless to pay it and draw it back out again...
I take your point and i think that is my main concern that HMRC would just take a dim view of it, even though there is actually nothing wrong.

Debt_Free_Chick

martinsutton wrote: »

this is exactly what i think - but the idea of someone giving me £50 cash for a hire and me putting it in my back pocket seems very strange! - Even though it would be declared legally on the tax return and then taxed if required.
thanks

Purely for book-keeping purposes, you would record £50 as income in the hire business and - on the same day - record drawings of £50. There's no need for the money to be deposited in the business account - it can be put in your back pocket, but it must be accounted for in the books. It's no different to putting it in the bank, then immediately drawing £50 out of the cashpoint. Indeed, if you think of the book-keeping in those terms, you won't go wrong.

The important thing is to account for the business income and the withdrawal in the books.

Debt_Free_Chick

martinsutton wrote: »

my main concern that HMRC would just take a dim view of it, even though there is actually nothing wrong.

They won't - they won't know and won't care provided you account for the income and the withdrawal. They are only interested in how you calculate your profit, which means declaring all relevant income and only claiming allowable expenses. How you spend your money is up to you

martinsutton

thanks for all the advice and nice to see everyone in agreement !

martinsutton

tyllwyd wrote: »

You also have to be careful to keep clear in your mind that the £50 has not been taxed at that point. So if you are given a £50 note, and you carefully record it in your books and go out and spend that £50, you have actually spent more than you earned, because you should have deducted the tax & expenses from that money.

fine with this as in reality there is some extra money in the account deposited by us (wifes redundancy money). So really we are just spending that.