From time to time you use your personal bank account for company business. Your bookkeeper says that this is illegal or at least breaks the terms and conditions of the account. Are they right and what are the consequences if they are?
The rights and wrongs of directors using their own bank accounts for company transactions is something we’re often asked about. In fact, if you look at most online business forums you’ll see questions on the subject crop up with monotonous frequency. The first thing to say is that there is no law that requires a company to have its own account. Neither is a director prohibited from using theirs for company transactions. Of course, that’s far from the whole story.
What the banks say
The terms and conditions of personal accounts vary from bank to bank. For example, NatWest and Santander are clear that their personal accounts must not be used for business. Lloyds and Barclays are more vague. They say business transactions aren’t covered by the terms and conditions (T&Cs) of your personal account, but go on to say you can’t claim against the bank for losses arising from business use of the account.
Tip. Banks can and do vary their T&Cs frequently. It’s easy to check the current version for any personal and business account on your bank’s website.
What isn’t mentioned in any of the T&Cs we looked at was what the bank would do in the event that you used a personal account for business. There are no penalties or charges specified. In our view they might be on weak ground if they attempted to apply charges for misuse of the account. However, they would be within their rights to close the account, which could be awkward for you.
Despite the banks’ T&Cs we know that in practice some directors do use their personal accounts for company business occasionally and sometimes exclusively – with the bank’s knowledge. We aren’t condoning or condemning the practice, but bear in mind the consequence, i.e. forced closure of the account. Plus, should the bank go under you might not be entitled to compensation in respect of any loss of business funds.
What’s a business transaction?
When a director pays company expenses from their personal account, say travel costs, does it count as a business transaction? Directors and, for that matter, employees often do this even if they’ll be reimbursed by their company. Transactions in the role of a director or employee are personal and within the T&Cs.
Sometimes circumstances might force you to put a business transaction through your personal account. For example, a tricky customer pays by cheque made out in your personal name instead of your company’s (a not uncommon delaying tactic by some debtors!). In that situation we suggest you bank the cheque and once it’s cleared make a counter payment to your company without delay. That ought to keep you on the right side of your bank. But if you want belt and braces, check with it first.
The law doesn’t stop a director using a personal bank account for company business, but it will usually break the terms and conditions of its use. While there are no financial penalties the bank can close your account. If a situation forces you to pay company income into your own account, pass it to your company ASAP.