Cash Businesses

Cash Businesses

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Just a quick question.

For small businesses, running as sole traders, is there any legal requirement to deposit all cash receipts into and make payments from business bank accounts?

I went to 2 high street banks today and got completely different answers. One said that it is illegal to not deposit cash into the bank account, but I have doubts, I suspect that they would want me to put the money in considering the amount of money they charge for 'looking' after my money. The other bank said that there is no such requirement.

I run a small business taking primary cash receipts and a few cheques every now and then. I pay for purchases by cash with a few expenses such as utility bills from the business account. I usually keep a steady float in my business bank account to cover these expenses, but I don't normally put all income into the bank. The remainder of my 'drawings' I either hold in cash, put into a personal account or spend it. All the money I have left over is mine, being a sole trader.

I don't think I will need to prepare detailed accounts, but I do have a qualified accountant to do my books for me. I do keep adequate records of all sales and purchases and I pay the right amounts of taxes on my business income. I have ran this system for a few years and the accountant did not even suggest that there is something wrong with this arrangement. I am just a bit confused with what the banks are telling me. It would be rather tedious if I am to deposit money into the account and make withdrawals for every small business transaction. 

Want another opinion to see if I am missing something. 

Thanks in advance.

Replies (18)

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By eastangliantaxadvisor
14th Aug 2012 07:37

You are right, it depends which bank you talk to!

 

There is no legal requirement to bank all cash takings into a bank account. Our advice is to bank as much of it as you can, as otherwise it can be difficult to keep track of business receipts - but if you have good records then there is no need to actually bank them. It is the standard of record keeping and if it can stand up to a HMRC enquiry that is important.

 

It is good pratice, however, to have a seperete business bank account.

 

On the subject of bank accounts, there are many people who use "non busisness" accounts to deposit or pay business bills. If they check the terms and conditions of the accounts carefully, most of them will have something that precludes them for using them for business use.

 

 

As an example, the First Direct terms and conditions says "This product shall not be used for business purposes."

I know if one high street bank who has asked its business managers and counter staff to be "on the look out" for customers using the private accounts for business use, and in such cases they have written and transferred the account to a business account (charging in the process).

Finally, if you do not have a business account, when and if you need a business overdraft or loan, you will have no or little track record and this can sometimes cause issues.

 

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By DMGbus
14th Aug 2012 08:14

Bank charges for banking cash

Last time that I saw a UK bank charges tariff for cash it was...

60p per £100 cash paid...

So, the more you pay in the more the bank makes (that's the most likely reason to encourage you to bank all the takings).

THERE IS NO LEGAL REQUIREMENT TO BANK ANY OR ALL OF YOUR CASH TAKINGS>  FACT.  FINAL.

Cash retail businesses that I know have found this premium price for handling cash by UK banks is a problem so they tended to try and pay as many bills in cash as they could to reduce the cash bankings and consequent charges.

Problem that arises with paying bills by cash is forgetting to record a cash paid expense - if the bill is mislaid then no record unless jotted down at time of payment (unlike cheque payments where the payment appears on hte bank statement as a record, at least, of the amount paid out even if the receipt is lost).

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By Roland195
14th Aug 2012 09:07

Knowing where ask questions

I am afraid you have learned the hard way (could have been much worse if you had acted on it though) that there are all sorts of "reputable" organisations that claim to offer business advice etc that you should run a mile from including:-

1. Banks - What they know about business/law/tax etc would not fill a stamp. Your "Relationship" manager is likely not old enough to remember Thundercats from the first time around.

2. HMRC- If you can get through at all, they will probably not help and then deny it afterwards. They do not regard it as their place to give advice unless around technical areas like online filing.

3. The Man in the pub - If he knows everything, why is he in the pub instead of his private Caribbean island 

Ask your Accountant. It's what he is there for.

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Replying to lionofludesch:
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By aliredwood
14th Aug 2012 09:25

Excellent summing up!

Roland195 wrote:

I am afraid you have learned the hard way (could have been much worse if you had acted on it though) that there are all sorts of "reputable" organisations that claim to offer business advice etc that you should run a mile from including:-

1. Banks - What they know about business/law/tax etc would not fill a stamp. Your "Relationship" manager is likely not old enough to remember Thundercats from the first time around.

2. HMRC- If you can get through at all, they will probably not help and then deny it afterwards. They do not regard it as their place to give advice unless around technical areas like online filing.

3. The Man in the pub - If he knows everything, why is he in the pub instead of his private Caribbean island 

Ask your Accountant. It's what he is there for.

 

Love it! Excellent summing up of the situation!

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By Sunny
14th Aug 2012 10:04

Thanks you for the answers. Really put me at ease.

 

Banks = They want my money to boost their capital but will still try to squeeze every penny out of us!!

 

I have never had an HMRC enquiry before. But I keep all records of receipts and payments on a spreadsheet which I update regularly. For all purchases and expenses I always keep invoices. So I don't think I will have a problem with HMRC if it ever happens.

I think I will need a business bank account as I sometimes take check payments and am currently in the process of setting up credit card payments. There are some banks which will offer free business banking for small businesses for the first 12-18 months or for transfers from different banks. I was thinking of changing to one of these. I was wondering if it was common for small businesses to regularly change bank accounts to take advantage of such deals. I estimate total bank charges per year to be between £200-£500, not a great deal of money but every little helps.

 

Thanks again.

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Replying to Portia Nina Levin:
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By Darren Ashley
22nd Aug 2012 11:16

Beware "FREE" banking...

Sunny wrote:

I think I will need a business bank account as I sometimes take check payments and am currently in the process of setting up credit card payments. There are some banks which will offer free business banking for small businesses for the first 12-18 months or for transfers from different banks.

Check the terms of the free banking offered by the bank as these can often exclude the cost of handling cash which would not help in the scenario you are faced with.

There are no issues with changing your banks regularly to take advantage of their offers but as mentioned in an earlier post may it could effect the ability to obtain overdrafts or loans for the business in the future.

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By Anishine
14th Aug 2012 10:32

Handling cash for business

I agree: you need a business bank account if you are a business, especially as a sole trader as it helps differentiate the money from the business from any other income sources (imho).  As already mentioned keeping track of cash transactions can be problematic so paying in the cash then making payments by cheque assists the bookkeeping process. 

As your income is mainly from cash transactions, as you estimate your bank charges to be about £200 per year it may be worthwhile looking at membership of the Federation of Small Businesses.  This costs £150 to set up as a sole trader then £120 per year afterwards but one of the benefits is free banking with a well known bank (the Co-Op) that is set to acquire a lot more branches than it has at the moment (from Lloyds TSB).  

The other more obvious benefits are the opportunities for networking, legal advice etc but as I have just discovered them thought I would mention it. 

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Man of Kent
By Kent accountant
14th Aug 2012 10:41

Load of b*ll*cks!

Roland is right, you will get lots a poor advice, especially from banks and HMRC (who both use the man down the pub for their internal helpline).

Provided you keep good accounting records:

1. List all receipts and payments and description of what it is.

2. Copies of invoices, receipts etc.

You'll be fine.

As for banking all receipts - load of b*ll*cks and waste of money. You'll get charged through the nose by the bank. Save yourself the bank charges - how about switching to an electronic tariff for your business account and for any cash received that you want to bank, pay it into your personal account and transfer to your business account from there. Lloyds charge £5 a month for this type of account and sure others do something similar.

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By Sunny
14th Aug 2012 11:10

I am currently with Barclays, paying £5.50 a month so that is only £66 per year. But the charge on cash deposits add up quickly.  

 

I think I will look into the FSB, thanks.

 

Anyone any ideas on the bank switching? Like savings accounts could I keep rotating to save on the costs. It might look unprofessional, but that is fine I am not a professional anyway, it isn't even my full time job.

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By Pelican
22nd Aug 2012 11:58

I have a client who receives quite abit of cash payments.

He deposits the money into his own personal account and then transfer it electronically to his business accounts.

This is a free way around the situation.

 

Although not on the money gets transfer as arthurphillips says but he has till receipts and I keep on top of all the money he recieves.

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By waltere
22nd Aug 2012 11:59

Changing banks every few years?

There's an oft-quoted "fact" that the British are more likely to get divorced than change their bank.  Not sure if that's true (personally, I'm on my seventh bank in about 30 years and still on my first wife!) but it's certainly not something that I would want to do too often.  I've just changed my (personal) banking from Santander to FirstDirect and the transfer of direct debits was a nightmare (several missed payments etc).  It's not like shopping around for car insurance so unless you can save very large amounts of money, I wouldn't think the upheaval of changing every few years was really worth it.  Find one that's good and stick with it.  I presume that the customer satisfaction ratings for personal banking roughly mirror the service that you'll get as a business customer, in which case have a look at a website like moneysavingexpert for their regular bank customer surveys.

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By louisVW4
22nd Aug 2012 12:23

Any legal issues with moving surplus cash from Business Account?

It would seem there are no legal restrictions to a (small) business maintaining a Business Account Vs a Personal Account, though the banks don't like it. However, my personal preference as a one-man band, is to maintain a digital Business banking account (Barclays) which has low charges, in which I keep the minimum of cash, and move any surplus cash to a personal savings account (Director's Loan Acc?) because the interest on a Business savings account is rubbish.

Are there any issues with this?

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By DMGbus
22nd Aug 2012 13:43

Traders can help each other re: cash banking charges

Some years ago I had a trader whose business included cheque cashing and pawnbroking.    So he had a need for large amounts of cash to pay out to customers.

He knew a local pub who, quite naturally, received quite large sums of cash from takings.

So the two businsses had an arrangement whereby my client gave a cheque in exchange for cash to the pub.    The pub then banked the cheque instead of cash saving significant bank charges whilst my client avoided paying charges to his own bank for drawing out cash.

 

I believe that national retailers reduce the amount of cash that they bank by having onsite cash machines - they load cash into the machines and presumably get a credit to their bank account for each time they load their cash (from takings) into the on site cash machine.

 

Some retailers have Paypoint facilities.  This creates for them a bank charges problem for all the cash that they collect via their Paypoint facility - at normal bank charges rates uneconomic to bank the cash as the bank charges (at established rates for cash paid in) would exceed the Paypoint commission earned.  The solution is that Paypoint made arrangements for one of the major banks to offer reduced rate banking of cash for Paypoint members/ agents.

 

 

 

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By David Gordon FCCA
23rd Aug 2012 12:51

cash business
There is no legal requirement (in England) to use a bank account.
In theory as you have discovered, it is simple to run a small business through cash accounting.
Unfortunately the HMRC mind-set is such, that you will have to keep exemplary records against the possibilty of a "Random" or "Aspect" enquiry.

When preparing your tax return, even if you come under the small business exemptions, you should attach and file a simple set of analysed accounts with the return, including comparative figures.
This pre-empts the question: Does the inspector hold sufficient information to review the business?

Otherwise, good luck!

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By Andrew_hound
24th Aug 2012 07:21

Private bank to business account

The problem with banking cash into a private account and then transferring it to business is that, if there is then an enquiry, HMRC will claim access to your personal bank accounts as well as the business one. Having successfully prevented HMRC getting access to private bank accounts (admittedly under the previous tribunal system) I always recommend clients to only use business accounts for business transactions and personal for personal. This extends to the usage of credit cards as well.

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By ShirleyM
24th Aug 2012 07:41

I thought they had to break the business records

before they could look at personal bank accounts.

If you show (for example) £500 capital withdrawn in cash, and then £500 capital introduced (via bank transfer), does this break the records and give them access to a personal account?

If so, would the production of personal bank statements be restricted to that one account, or could they start wading through all personal accounts?

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Image is of a pin up style woman in a red dress with some of her skirt caught in the filing cabinet. She looks surprised.
By Monsoon
24th Aug 2012 09:02

Agree with Shirley

I distinctly recall from an Investigations webinar that they have to break the records before wading through personal accounts. I'm not sure on the £500 capital introduced ( would have thought not) but even if they did, that wouldn't give them carte blanche to see everything - just the source of the capital. Anyway, capital introduced is not broken records.

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By geoffwolf
27th Aug 2012 17:15

reply to LouisVW4

A Directors Loan Account presupposes that the business you describe is a Ltd Company. Asil Nadir has just been sent down for 10 years for assuming that Company money is his own. The interest earned is not really yours. In theory the company should be charging you interest on the loan at least at the same rate as you receive.

Your problem is that the interest you receive is taxable but the interest you are charged by the company is not.

 

Admittedly HMRC rarely pick up these points but the matter is not as simple as you make it appear.

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