7 Mistakes New UK Businesses Make with Small Business Accounts (and How to Fix Them)

Are you submitting your statutory accounts to Companies House on time? Missing deadlines like these can cause penalties to your UK business. And as an accountant, I see this happen often. 

A UK business accounting costs survey said companies managing their payroll, VAT returns, inventory invoices, and bookkeeping lose at least £15,000 yearly. 

With an understanding of basic accounting principles, you can manage some of your business finances effectively, including:

1. Enter data
2. Align bank statements
3. Categories expenses
4. Generate basic reports  
5. Bill payments and invoices

The infographic below breaks down the bright and risky sides of handling your business accounts. 

Let’s explore new UK businesses’ mistakes with their finances and how to avoid them. 

Mistakes New UK Businesses Make with Their Small Business Accounts 

1. No Track of Petty Cash Expense. 

Petty cash expenses refer to any business-related petty purchases made with cash. This could include: 

• Inventory purchases 
• Printer cartridges 
• Sticky Notes 
• Mileage allowance 
• Even pens, pencils, and staples  

Note: For mileage allowance, you must closely track your official travels. The mileage allowance pays 0.45 pence per mile for up to 10,000 miles and 0.25 pence after 10,000 miles.  

Not tracking these expenses means no record of where the money went, creating a blind spot in your financial records. These blind spots can lead to taxation issues, inaccurate P&L statements, cash flow problems, and a risk of fraud.  

You must manage the petty cash log to be submitted to HMRC. You need to note the purchase’s date and purchase in your petty cash log. You can also try some other options like: 

• Use a Designated Credit Card 
• Use Expense tracking Mobile Apps 
• Collect regular receipts 

2. Neglecting Tax Advantages for Limited Company Formation Costs 

Founding a company puts a lot of financial burden on your shoulders. Many overlook that some of these expenses are claimable as per pre-trading expenditures.  

Even so, you can reclaim a few expenses up to 7 years into your company inauguration. Some of the regular expenses you can reclaim are: 

• Accounting and Legal advice fees for up to six months 
• Your domain name fee and web hosting  
• Your amount of IT and office supplies, including laptops, stationery, and more 
• If you are travelling or accommodating for business purposes 
• Advertising, marketing, or anything related to the promotion of your business  

You can read more about the pre-trading expenses in the S57 Income Act 2005 and S61 Corporation Tax Act 2009 (CTA 2009). 

3. Oblivious About Tax-efficient Drawing  

Some company owners withdraw money from the company account whenever needed without considering tax implications. There are smarter ways (tax-efficient drawings) to withdraw money. Some of the ways are.

Salary and Bonuses 

Instead of just withdrawing money from your limited company account, you can pay yourself with a regular pay check like an employee. The first £12,570 is your tax-free personal allowance.  

Dividends 

Once you pay the cooperation tax, which is currently 19%, the remaining amount can be distributed among shareholders, including yourself, as dividends. The first dividends of £1,000 are tax-free and considered a dividend allowance. 

Even after a year, the dividends tax rate is lower than the income tax on salary.

4. Overdrawn Director’s Loan Account  

A director’s financial transactions with their company are recorded, excluding salary, dividends, and approved expenses. The record tracks the director’s money in the company and what they take out as loans and withdrawals. 

People often withdraw money from their limited accounts, and eventually, the balance becomes negative. Once the withdrawal crashes to negative, it implies the tax implications of section 455, i.e., recoverable tax.  

Depending on the director’s financial situation, ways exist to address this situation. 

Note: Formally writing off a portion of your debt requires proper accounting procedures, justification, and exceptional circumstances due to potential tax implications.  

5. Not Claiming Allowable Expenses when using the Home as Office 

There is an allowance expense that you can claim against your tax bill when you are working from home.  

But there is a catch: it is only claimable when proper facilities are not available to perform the job at the employer’s premises, or the employer requires you to live far from the office premises.  

If you qualify for the allowable home expense allowance, you get advantages against expenses like: 

• A Portion of utility bills (electricity, gas, water) 
• Phone and internet bills 
• Council tax 
• Rent of mortgage interest 
• Buy or Lease office equipment 
• Repairs to the home office 
• Running cost of home office 

6. Not Submitting Statutory Accounts 

When small businesses are dormant, they think they are no longer eligible to submit statutory accounts and cooperation tax with returns to Companies House and HMRC. 

In case of not submitting the statutory accounts, new small business account owners in the UK face the following implications: 

• Companies House imposes automatic penalties for late filing of statutory returns. The penalty amount increases the longer the accounts are overdue.  
• Late filings become a matter of public record, damaging your company’s reputation and company’s making it difficult to obtain credit or attract investors.  
• In extreme cases, Companies House can strike the company off the register and dissolve it.  

To avoid such implications, your company should establish a system to ensure timely filing of statutory accounts.

7. Missing out on Confirmation Statement Submission  

For smooth business operations in the UK, your company must deliver a confirmation statement to Companies House at least once a year, even if the company is dormant.  

Missing confirmation statement submission can have some severe repercussions. 

The registrar might consider your company is not carrying on business and take steps to strike from the register. If the registrar strikes a company off the register, it ceases to exist, and all its assets become Crown property.  

Failing to do so is a criminal offence.

The Bottom Line 

Following these tips allows new UK business owners to avoid common mistakes and effectively manage their small business accounts. 

If you are new to small business accounting, it can be daunting to navigate the tax maze. More Than Accountants provides accountancy services for small business accounts. We provide small business accounting services to businesses throughout the United Kingdom.