As a small business owner you might be able to fall back on its cash reserves during the coronavirus lockdown. If so, what are the longer-term tax and NI consequences for you and your business?

Rules still apply

While the government is taking extraordinary steps to help businesses during the coronavirus lockdown period and beyond, it doesn’t mean that the tax rule books have been thrown away. Though it’s quite likely the government and HMRC will take a more relaxed approach in the aftermath, it makes sense to work within the established rules to avoid trouble later on. For example, when using your business’ cash reserves to cover personal costs.

Incorporated or unincorporated

The first important point to make is that the position for companies, even one-person companies, is entirely different compared with that for unincorporated businesses, i.e. sole-traders (self-employed) or members of a partnership (including a limited liability partnership).

Unincorporated businesses

If you draw cash from your business bank accounts or use them to settle personal bills, there are no direct tax or NI consequences. Your tax and NI bill is worked out on the amount of profits your business makes and not how much cash you draw. So even if you borrowed money from your bank to fund you over this tricky period it won’t count as taxable income.

Companies

The tax position is very different if you’re a director shareholder of a company. Every cash payment or personal bill paid by your company can count as taxable income, i.e. as salary, dividends, or benefits in kind, each with the usual tax and NI bills and compliance requirements that go with them. Alternatively, you can treat the cash you take as a loan; this isn’t necessarily free of tax consequences but is generally a cheaper and more flexible arrangement.

Tip. The good news is that where your company is indebted to you, say because you lent it money to get it up and running, you’re entitled to treat any cash taken or bills paid on your behalf as non-taxable.

Trap. To prevent unnecessary tax liabilities resulting from drawing or using your company’s cash for personal benefit, keep accurate records indicating how you have categorised the money taken from your company. If you don’t, HMRC might argue that cash you take is salary on which PAYE tax and NI is payable which you should have reported through your payroll software. Failure to do this can result in penalties.

Timing and proper record keeping

If you want to treat the cash you take from your company as a loan, keep a board minute or written record to make sure the bookkeeper knows to record the transaction as a debit to your director’s loan account (see The next step ). If later you want to clear all or part of the debt you’ve built up with your company, you can approve a dividend or bonus. But rather than drawing the cash from your company you can ask your bookkeeper to use the dividend or bonus as a credit to your loan account.

There are no tax and NI consequences if you are a sole trader or a member of a partnership. By contrast, as a director shareholder any money you take from your company can count as taxable income. To minimise or eliminate tax or NI bills, take the money as a debit to your director’s loan account.