Why do I have to put all my earnings into a bank account before I can draw them out to pay people?

Why do I have to put all my earnings into a bank account, before I can draw them out to pay people?

This is a question commonly asked by new businesses. It is particularly relevant if your business is one that involves multiple acts at a venue you do not own, where attendance is paid at the door.

It is very common for a business to advertise an event, which takes place at a pub, club or similar venue. The event is advertised and customers simply turn up. There may be little or no ticket purchasing in advance. The performers will expect to be paid on the night, and will often expect payment in cash. At this point it is very tempting to take the door takings and simply pay the performers from this sum of money.

However, this is fraud. At no point has the income ever been recorded. Therefore at the end of the year it cannot be declared as company income.

The income was received for a service offered i.e. your club night. This makes the money business income. The money was then paid out to the performers. This makes it business expenditure.

If you have no receipts or paper trail for any of this money, it is effectively being earned and used illegally - sometimes referred to as "on the black market". No tax will be paid on it and you will have defrauded her Majesty's Government of taxation.

Tax is a reality of running a business. It should not be avoided and despite what some people may think, avoidance is always found out. The penalties for not declaring taxable earnings are high and simply not worth it. It is better to be in the know and get it right from the start.

There are some simple procedures you can follow to prevent inadvertently avoiding tax. They involve recording all income and expenditure.

• Agree with all parties in advance what costs will be. Talk to the performers and the venue owner - what do they expect to be paid? Do they want cash or a cheque? Either way, you need a receipt from them - either in advance or on the night. This is the start of the paper trail. Ideally, you should also have a contract in place so that confusion is avoided and action can be taken if any party defaults.
• Take out the money to pay everyone. Make sure that you take out all costs in advance from your business bank account. This is the next part of the paper trail. It shows that legitimate business expenses have been removed - you can now tie this expenditure up with the invoices you have been given.
• Bank your income. The takings from the night - whether these be door takings, till takings or any other income - must now be banked. This is the third part of the paper trail. It shows that you received income and this will be used for any tax calculations that your Accountant does for you.
• Make sure you file everything away. Use a method that seems easy to you - 12 envelopes, one for each month - a concertina file - a lever arch file split into sections. The method is less important than your ability to prove expenditure and income when questioned by HMRC [1] you need to file:
  
  - Invoices
  
  - Contracts
  
  - Receipts
  
  - Bank statements
  
• Record your finances. Make sure that you have a file that shows ALL money in and out. This can be a hand written ledger - something like Simplex D - or an electronic spreadsheet. HMRC will expect to see this something in the next couple of years. They will also expect to be able to tie it all up with every bit of paperwork.
  
  Simply put, it is a legal imperative that your keep good financial records, whether you are a Sole Trader or a Limited Company. If you do not, HMRC will estimate what they believe you owe and you are legally obliged to pay it. This is may well be higher than what you believe you earned, but if you don't have any paperwork, you can't prove it! And don't be tempted to run the business through your personal bank account. How will you prove that the birthday cheque given to you by your auntie was in fact NOT income from your business? HMRC will need paperwork for that too!
  
  Time spent, every week, pulling your finances together will save you time and money in the long run.
  
  

  Tania M C Lewis
  

  22nd Nov 06
  
  
  
  

  [1] Her Majesty's Revenue and Customs - formerly referred to as The Inland Revenue.