Personal versus Company Expenditure

In the daily life of UK accountants, perhaps no judgment call is as pervasive—and as potentially contentious—as determining whether an expense is personal or business-related. The ramifications of this decision affect profit and loss, corporation tax computations, benefit-in-kind assessments, and directors’ loan accounts. Yet strikingly, despite the centrality of this issue, there is a conspicuous absence of any statutory definition or overarching framework that directly addresses the meaning and accounting for a “personal expenses.” In the absence of any rules, directors and accountants rely on an extraordinary melange of tangentially related tax rules, personal value judgments, and whatever works out best for tax.

A Notable Gap in Standards and Legislation

Neither the UK’s Financial Reporting Standard 102 (FRS 102) nor the IFRS international financial reporting standards makes explicit reference to “personal expenses” in the context of small private companies. There are, of course, general requirements regarding faithful representation and neutrality but these principles stop short of defining whether, for example, the purchase of a mobile phone used partly for business and partly for private calls should be borne by the company or recorded as loan extended by the company through the director’s loan account for repayment by the director.

Company law offers no clarity either. The Companies Act 2006 contains detailed prescriptions on accounting records, disclosure of related party transactions, and the duties of directors, but does not touch upon the core issue of how to delineate personal from company expenditure. This omission is not trivial; it leaves practitioners reliant on convention, HMRC practice, and professional judgment.

Tax Law as an Indirect Guide

Tax legislation provides more insight, though it too falls short of offering a definitive rulebook. The Income Tax (Earnings and Pensions) Act 2003 (ITEPA) includes specific exemptions and rules that have significant implications for whether an expense is considered personal or business-related. One typical example lies in the special provisions for ministers of religion, where accommodation costs can be treated as exempt benefits when provided by a charitable employer. This carve-out implicitly acknowledges that what might be a taxable personal benefit for one director can be a legitimate charitable expense for another, depending on their role and context.

Elsewhere, the benefit-in-kind rules under Income Tax (Earnings and Pensions) Act s203–s222 require that any expenses paid or reimbursed by the employer that are “for the employee’s private use” be taxed as employment income. However, these sections still operate within the assumption that the expense has already been categorised—without statutory help—as a company expense rather than a recoverable loan laid out by the company for recovery from the beneficiary. In practice many small business accountants and owners will take the most tax efficient option.

HMRC’s Approach: A Patchwork of Manual Guidance

In the absence of legislative clarity, HMRC manuals serve as a quasi-normative source of authority. For instance, HMRC’s Business Income Manual (BIM) refers to the wholly and exclusively test under Income Tax (Trading and Other Income) Act 2005 s34, disallowing expenses not incurred wholly and exclusively for the purposes of the trade. Yet this is fundamentally a deductibility test for tax, not an accounting policy guideline.

Where company directors are concerned, HMRC’s Employment Income Manual (EIM) and Company Taxation Manual (CTM) frequently assume that improperly charged personal expenses should be debited to the director’s loan account. But this treatment, though widespread, is not underpinned by an express legislative requirement. It reflects administrative practice, not legal obligation, and there is no definition

Director Loan Accounts: A De Facto Solution

In practical terms, the director’s loan account (DLA, also known as the Director’s Current Account) has become the default mechanism for dealing with ambiguous or misclassified expenses. Where a personal item is paid through the company, accountants typically adjust by debiting the director’s loan account—a balancing entry that is neither an income nor an expense of the company.

This treatment is often justified retrospectively, based on HMRC’s rules under Corporation Tax Act 2010 s455, which imposes a tax charge on overdrawn DLAs, and under Income Tax (Earnings and Pensions) Act 2003 s175, which taxes interest-free loans above certain thresholds. Yet this is reactive legislation addressing the consequences, not the classification itself.

Dividends

Conceptually expending the money of the company for the benefit of an owner-director fits more comfortably into categorisation as a dividend or distribution of profit than a loan, particularly when there is no settled intent to repay. There are certain formalities that dividends which are not paid up have to be subjected to, but where dividends are paid the only condition under the model articles of association most limited companies have is that there are sufficient profits in the business to sustainably fund the drawing. I have successfully argued for this treatment in tax investigations, and it is often overall a more beneficial position than an overdrawn director loan account from a tax on overdrawn loan account and benefit in kinds tax point of view.

Why the Silence?

The absence of a direct definition of personal expenses in either accounting standards or primary legislation is extraordinary when one considers the volume and frequency of such decisions in small companies. One explanation may lie in the historic assumption that accounting standards are principles-based, leaving granular judgments to the discretion of preparers and auditors. Another may be the systemic reliance on HMRC manuals and case law to do the job that standards have avoided. Perhaps the assumption was that directors in companies large and small maintain a separation of the personal and the business related – but my experience is that directors of companies of all sizes are not prone to such structured habits.

Conclusion

The boundary between personal and business expenditure remains one of the most significant yet legally undefined areas of UK accounting practice. While HMRC guidance and tax law provide some practical pathways, they do not amount to a consistent or principled framework. It is left to accountants to exercise professional judgment—guided more by convention and HMRC expectation than by authoritative standards.

This reliance on informal norms over explicit rules invites inconsistency and risk. As such, there is a compelling case for the standard setters or legislators to address this lacuna.

Use of AI

This blogpost was written with the assistance of AI to marshal a paragraph of my thoughts into prose and to provide an accompanying image.