Contractors' Questions: How to fix paying repair man with company cheque?

Contractor’s Question: I have a query about expenses because the other day I needed to pay a sizeable sum of money for home maintenance. It was somewhat of an emergency repair, mainly to my boiler, and needed seeing to immediately.

As I didn’t have cash on me at the time, I had little choice but to pay the repair man using my limited company account’s cheque book. This is obviously not a cost that the company can permanently absorb (even though I do often work from my home). What do I need to do to make things right, from an accounting standpoint? Is it just a case of transferring the amount of money I paid out from my personal account into my company account?

Expert’s Answer: 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 HM Revenue & Customs 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 £5,000 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, if the loan remains outstanding more than nine months after end-of-year there is 25% tax charge on a 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 HMRC’s 2010 and 2013 manuals on expenses and benefits.

The expert was Sumit Agarwal, managing director of contractor accountancy firm DNS Associates.