1. Trading a limited company through a personal bank account
Applies to: Limited companies only
Some directors start trading before opening a business bank account, using a personal account “temporarily”. Once the company begins trading, this stops being a casual shortcut and becomes a structural problem: the legal entity earning the income is not the one whose name is on the bank statement.
Why this is high risk
- There is no clear distinction between company money and personal money.
- Every incoming and outgoing transaction becomes ambiguous: salary, loan, dividend or personal spend.
- Statutory accounts become unreliable because no one can prove which entries belong to the company.
- Banks may review or freeze accounts when personal products are used for commercial trading.
- HMRC often treats this as a sign that income may not have been fully declared.
When it does not apply
Sole traders can legally use a personal account, but lenders and insurers often dislike it. Even for sole traders, mixing everything together usually leads to inaccurate tax calculations and messy enquiries.
Example
A director routes all limited company income and costs through their high street current account. At year-end, neither the director nor the accountant can say with confidence which items are business and which are personal. The company’s statutory accounts become guesswork, and the director’s loan position cannot be proved.
2. Paying yourself without using payroll
Applies to: Limited companies
It is common for directors to transfer money to themselves and call it “salary”. Unless this is processed through payroll with Real Time Information (RTI) submissions, it is not salary, it is a series of undocumented withdrawals.
Why this is high risk
- HMRC may reclassify transfers as unreported wages and pursue PAYE/NIC.
- RTI penalties accumulate monthly if payroll should have been operated but was not.
- Pension auto-enrolment duties may have been triggered without anyone realising.
- Company accounts no longer match HMRC’s PAYE records, making year-end filings harder.
- The director’s loan account becomes distorted by a mixture of true loans and disguised pay.
Example
A director pays themselves £1,000 every Friday “as wages” from the company account but runs no payroll. Within a year, the company faces late RTI penalties, underpaid PAYE/NIC, inconsistent internal payroll reports and a director’s loan imbalance that is difficult to untangle.
3. Declaring dividends incorrectly or paying illegal dividends entirely
Applies to: Limited companies with shareholders
Dividends are not just labels in the software. In UK company law, a valid dividend requires:
- sufficient retained profit (distributable reserves),
- a board decision (minute), and
- a dividend voucher for each shareholder.
Many owners treat dividends as a salary alternative, paying fixed monthly amounts without checking reserves or keeping paperwork.
Why this is high risk
- A dividend paid without reserves is an unlawful distribution.
- HMRC may reclassify payments as salary, making PAYE and NIC due.
- Illegal dividends may need to be repaid by the director personally.
- Regular fixed-amount “dividends” paid like wages resemble disguised remuneration.
Example
A company with £200 profit at year-end pays the director £12,000 in “dividends” during the year. On review, there were never any distributable reserves. None of these payments are legally valid, and the director may be required to repay the £12,000.
4. Not recording major liabilities: VAT, PAYE, loans or tax owed
Applies to: Any business registered for these taxes or holding finance agreements
A business can owe significant sums without those obligations appearing anywhere in the accounts. This usually happens when submitted returns or loan agreements are tracked outside the bookkeeping system, or only in email.
Typical omissions include:
- VAT returns that were submitted but not yet paid.
- PAYE/NIC reported to HMRC but not settled.
- Corporation Tax that has been calculated but not accrued for.
- Hire purchase agreements or bank loans that never appear on the balance sheet.
Why this is high risk
- Statutory accounts become incorrect or misleading.
- Solvency can appear better or worse than it really is.
- HMRC may issue penalties for late payment even when the software appears “clean”.
- Banks and lenders rely on recorded liabilities when assessing affordability.
- Tax reliefs and interest calculations can be wrong if the underlying balances are missing.
Example
A company has £9,000 in unpaid VAT, £6,000 in PAYE and £12,000 Corporation Tax due. None of these balances are entered in the software. Management reports show “healthy cash flow”, but in reality the business is already committed to £27,000 of unpaid obligations.
5. Under-declaring income because channels do not match the books
Applies to: All businesses
Many businesses now have multiple income streams: bank transfers, card machines, Stripe, PayPal, SumUp, Shopify and marketplaces. If bookkeeping reflects only the net payouts, not the gross sales, income can be understated without anyone intending to under-declare.
Why this is high risk
- Payment processors share data with HMRC.
- HMRC’s systems compare merchant income with declared turnover.
- Inconsistent sales patterns across platforms trigger questions, even if the error was accidental.
Examples
- Stripe shows £180,000 in gross sales; the books show £165,000 because fees were never recorded separately.
- A takeaway business has card payments of £12,000 per month but declares £8,500 per month as turnover.
- PayPal sales are only recorded when withdrawn to the bank, not when orders are placed.
Each of these patterns looks like under declared income, even if the intention was honest.
6. Incorrect treatment of director’s loans and money withdrawn from the business
Applies to: Limited companies
Director’s loan problems are not limited to an overdrawn balance. They arise when the company is treated as an informal personal bank account and entries are used to plug gaps rather than record genuine loans.
Serious patterns include:
- Long term use of the company as a personal spending account.
- Repaying a director’s loan with dividends when there are no reserves.
- Large, interest free loans where interest should be charged for tax purposes.
- “Bed and breakfasting”: repaying the loan just before year-end, then taking the money out again.
- Lending large sums to directors with no loan agreement or repayment plan.
Why this is high risk
- Overdrawn balances can trigger additional Corporation Tax charges and Benefit In Kind issues.
- Mistaken loan entries distort statutory accounts and solvency assessments.
- Transactions can be reclassified as salary or unlawful dividends on review.
- The company may appear insolvent when it is not, or solvent when it is not.
Example
A director regularly draws funds labelled “loan” when profits are low, then “repays” the balance with dividends at year-end without checking reserves. Several years later, it becomes clear that the dividends were unlawful and the director remains personally owed a large sum to the company.
7. Failing to operate VAT correctly
Applies to: VAT registered businesses
VAT errors fall into two broad categories: simple coding mistakes and more serious compliance failures. The second group is where risk escalates quickly, especially when the same mistake is repeated across multiple returns.
High risk failures include:
- Claiming VAT without a valid VAT invoice.
- Mixing zero rated and exempt supplies incorrectly.
- Failing to apply the domestic reverse charge in construction.
- Incorrect use of the Flat Rate Scheme.
- Reporting VAT based on payouts from card machines instead of gross sales.
Why this is high risk
- VAT penalties and interest compound quickly once HMRC identifies a pattern.
- HMRC’s systems are increasingly automated and cross check merchant and VAT data.
- Repeated errors suggest weak controls rather than isolated oversight.
Example
A business routinely claims VAT on fuel receipts that show only a total and no VAT breakdown. During a VAT review, HMRC disallows the entire claim. The fuel was genuinely used for business, but the documentation does not meet VAT invoice requirements.
8. Failing to register for Anti-Money Laundering supervision (AMLS)
Applies to: Specific regulated businesses
Some types of business in the UK must register for anti-money laundering (AML) supervision with HMRC or a professional body such as ACCA or ICAEW. This is not optional compliance “best practice”, it is a regulatory requirement that sits alongside tax and Companies Act duties.
If a business carries out regulated activities but never registers for supervision, it is technically non compliant from day one.
Why this is high risk
- HMRC can impose civil penalties for trading without AML supervision.
- In serious or repeated cases, businesses may appear on HMRC’s public AML penalty or “name and shame” lists.
- Banks may review or restrict facilities if they believe a regulated business is unsupervised.
- Credibility with clients is damaged, especially in professional services.
- If something does go wrong, the absence of AML procedures makes the position materially worse.
When it does not apply
Most ordinary trading businesses, shops, restaurants, consultants, online retailers, tradespeople and similar, do not need separate AML registration. The obligation is specific to sectors such as:
- accountancy and bookkeeping service providers,
- insolvency practitioners,
- trust or company service providers,
- estate agents and letting agents,
- money service businesses and certain high value dealers,
- some crypto linked activities.
Example
A small accountancy practice has traded for several years without realising it needed separate AML supervision with HMRC. When applying for a new bank facility, the lender asks for AML registration details. The absence of supervision prompts further questioning and a referral to HMRC’s supervision team.
9. Ignoring CIS requirements in construction
Applies to: Contractors and subcontractors in the construction industry
The Construction Industry Scheme (CIS) carries strict rules because the sums withheld are effectively tax collected at source. Errors attract close scrutiny even when there was no intention to avoid tax.
High risk errors include:
- Paying subcontractors without verifying them under CIS.
- Applying the wrong deduction rate.
- Failing to separate labour and materials correctly.
- Claiming CIS suffered incorrectly on company tax returns.
Why this is high risk
- CIS penalties accumulate quickly for late or incorrect returns.
- HMRC can challenge years of historic payments if the pattern looks wrong.
- Incorrect deductions can create cash flow issues for subcontractors and disputes on site.
Example
A contractor pays several subcontractors gross for months without verifying them. On review, HMRC concludes that CIS should have been deducted. The contractor becomes liable for tax that should have been withheld, plus penalties and interest.
10. Behaviour that triggers banking or AML concerns
Applies to: All businesses
Banks rarely explain why they freeze, close or review accounts. However, there are recurring behavioural patterns that increase perceived risk from a banking or AML perspective.
Common triggers include:
- Using personal accounts for limited company trading.
- Large, repetitive or unexplained cash deposits.
- Unusual transfers between related companies or overseas accounts.
- Inconsistent invoicing compared to reported turnover.
- High value transactions with no supporting paperwork when requested.
Why this is high risk
- Banks do not need proof of wrongdoing to restrict or close facilities.
- Reviews can disrupt cash flow and damage supplier and payroll relationships.
- Frequent account changes make it harder to maintain clean accounting records.
Example
A company repeatedly transfers five figure sums between the director’s overseas account and the UK company account with minimal description. When the bank’s monitoring team reviews the pattern, they request evidence and temporarily restrict outgoing payments until satisfied.
11. Filing accounts that do not reflect reality
Applies to: Limited companies
On paper, the statutory accounts look fine. In practice, the bank balance, debtors, creditors and bookkeeping system bear little resemblance to what has been filed at Companies House. This often happens when accounts are produced on outdated or incomplete records.
Why this matters
- Filed accounts form part of your public financial identity.
- Lenders, insurers and potential investors rely on them without seeing the underlying data.
- HMRC compares filed accounts with VAT returns, payroll data and other submissions.
- Serious mismatches raise questions about whether income has been fully reported.
Example
A company files accounts showing £60,000 cash at year-end. The actual bank balance on that date was £4,500. To HMRC and lenders, this looks like either undeclared cash income, poor controls, or both.
12. Reclassifying transactions to tidy up profit
Applies to: All businesses
Directors sometimes move costs or income between categories, or even between years, to smooth the numbers. Sometimes this is done innocently; sometimes it is more deliberate. Either way, once figures stop reflecting actual events, the accounts become unreliable.
Why this becomes a serious issue
- Moving routine expenses into assets artificially boosts profit.
- Shifting income into the wrong period hides genuine performance issues.
- HMRC looks for patterns where margins suddenly improve without clear explanation.
- Investors and lenders make decisions based on numbers that no longer reflect reality.
Example
An IT company capitalises £18,000 of routine contractor invoices as “equipment” to improve reported profit before meeting a lender. On closer review, there is no asset, just ordinary labour costs moved into the balance sheet to flatter short term results.
13. Not recording work in progress (WIP)
Applies to: Service businesses, construction, manufacturing
Longer projects often run for months. Work is delivered gradually; costs are incurred early; and invoices may be raised in uneven stages. If none of this is recognised as WIP until the final invoice, the accounts will not show what has actually been earned.
What goes wrong
- Assets are understated because part completed work is invisible on the balance sheet.
- Profit fluctuates wildly between months or years with no link to real performance.
- VAT timing becomes inconsistent if invoices do not match the work performed.
Example
A design agency finishes 80% of a £20,000 project in March but invoices in April. If they record nothing in March, the year-end results show a weak year followed by a sudden jump, even though most of the work was actually completed before year-end.
14. Unclear or undocumented inter-company transactions
Applies to: Directors with multiple companies or groups
Money often moves between companies under common control. Without documentation, it becomes impossible to explain why funds moved, on what terms, and how each entry should be treated.
Why this causes problems
- HMRC may treat unexplained movements as taxable income.
- Interest may be required on inter-company loans for tax purposes.
- Accounts for each entity stop matching, which is a major red flag.
- From an AML perspective, banks dislike unexplained flows between related entities.
Example
Company A transfers £25,000 to Company B labelled simply “support”. Without a clear loan agreement, recharge or dividend policy, neither company can show how this should be treated. On review, all options, loan, income, distribution or VAT-able recharge, become open to challenge.
15. Missing or incorrect capital allowances on assets
Applies to: Any business buying equipment, vehicles or tools
Capital allowances reduce taxable profit, but only if assets are identified and recorded correctly. Problems arise when spending is either buried in day-to-day expenses or capitalised when it should have been treated as a repair.
What goes wrong
- Businesses forget to claim allowances they are entitled to.
- Alternatively, they over claim by treating non qualifying items as capital.
- Asset registers become inaccurate or non existent, making disposals difficult to handle later.
Example
A company buys £12,000 of equipment but records it as stationery and office sundries. They lose out on capital allowances, distort profit, and have no record of the asset when it is sold three years later.
16. Treating personal assets as business assets
Applies to: Limited companies and partnerships
Owners frequently use personal laptops, cars or tools in the business. Problems arise when the bookkeeping records the asset as if the business owns it outright, rather than recognising it as privately owned but partly used for business.
Why this is risky
- Depreciation becomes incorrect because the starting value and ownership are wrong.
- Benefit-in-kind issues can arise if private assets are effectively provided to the owner by the business.
- Insurance may not cover the asset if the policy and legal ownership do not match.
- Disposals can create capital gains complications when ownership is unclear.
Who this does not apply to
Sole traders have more flexibility because the business is not a separate legal entity. Even so, keeping a clear record of which assets are used for business and to what extent makes tax and insurance discussions much easier.
Example
A director’s personal car is recorded as a company asset at full value and depreciated over several years. When the car is sold, neither the director nor the accountant can clearly show who owned it or how private use should have been treated for tax purposes.
17. Ignoring foreign currency gains and losses
Applies to: Businesses trading in foreign currency or on international platforms
Exchange rates fluctuate between the date you issue an invoice and the date you get paid. If those differences are not recorded, profit figures stop matching the economic reality of the business.
Why it matters
- UK GAAP requires recognition of foreign exchange gains and losses.
- Under-reporting gains or overstating costs distorts taxable profit.
- VAT on cross border services can be misreported if exchange rates are ignored.
Example
You invoice the equivalent of £10,000 in USD when the rate is 1.25 and receive payment when the rate is 1.20. The £400 difference is a real foreign exchange gain. If it is not recorded, both profit and tax calculations are incomplete.
18. Running a growing business without a stock system
Applies to: Retail, e-commerce, wholesalers, manufacturing
Guessing stock levels may be workable in the earliest stages. Once turnover grows, relying on a spreadsheet “last updated three months ago” stops being pragmatic and starts being a compliance risk.
Why this quickly becomes a problem
- Cost of sales becomes guesswork rather than a calculation.
- Gross margins appear unrealistic and attract HMRC attention.
- Losses from shrinkage, theft or error remain hidden.
- Purchase planning becomes chaotic, leading to cash flow issues.
Example
An e-commerce business carries roughly £40,000 of stock at any time but has no reliable system for counting it. Year-end stock is estimated based on what feels about right. The resulting cost of sales figure is little more than a guess, and profit can move by tens of thousands of pounds on paper without any real world change.
19. Backdating minutes, dividends or contracts
Applies to: Limited companies
It can be tempting to tidy up the paperwork after the event by creating minutes or contracts and giving them an earlier date. Once documentation no longer reflects what actually happened and when, it moves into the territory of misrepresentation.
Why this is severe
- HMRC may disallow dividends and reclassify them as salary with PAYE and NIC due.
- Contracts may not hold up in disputes if dates or terms appear to have been changed after the fact.
- Auditors treat backdating as a serious governance failure.
Example
A dividend is decided in July but board minutes are drafted months later and dated “31 March” to ensure the payment falls into the previous financial year. If challenged, HMRC is likely to treat this as backdating and question the validity of the dividend.
20. Incorrect VAT treatment on deposits and advance payments
Applies to: VAT registered businesses taking upfront payments
VAT has its own timing rules that do not always align with when you recognise revenue or consider a job to be earned. Deposits and stage payments can easily fall into the wrong VAT period if the focus is only on the invoice date.
How businesses get caught
- VAT is due on the deposit date in many cases, not when the job is completed.
- Staged payments may cross multiple VAT periods and need to be reported accordingly.
- Revenue is often recognised too early or too late compared to the VAT position.
Example
A contractor receives a £5,000 deposit in March but records and declares the VAT in April when the main invoice is issued. Technically, VAT should have been accounted for when the deposit was received, so the March return is understated.
21. Treating contractors like employees
Applies to: All businesses hiring workers
Calling someone “self-employed” or “a contractor” does not make it true in law. HMRC and employment tribunals look at how the working relationship operates in practice, control, equipment, risk and substitution, rather than the label on the invoice.
Why this is high risk
- HMRC may demand backdated PAYE and NIC if a worker is, in substance, an employee.
- Workers may be entitled to holiday pay, sick pay or redundancy rights.
- Insurance policies may not cover misclassified workers in the event of a claim.
Example
A contractor works fixed hours on your premises, using your equipment, under your direction, for years. They do not advertise to other clients and cannot send a substitute. On review, HMRC is likely to treat them as an employee and seek backdated payroll taxes.
22. HMRC balances that do not match the bookkeeping software
Applies to: Anyone registered for VAT, PAYE, CIS or Corporation Tax
It is common for software to show nothing owed to HMRC while HMRC’s own account shows a balance outstanding. This gap usually opens up when returns, payments or adjustments are handled outside of the bookkeeping routine and never reconciled back.
Why mismatches happen
- Manual payments not reconciled against liabilities.
- Late or amended submissions that the software never imports.
- Corrections made by HMRC that are not mirrored in the bookkeeping system.
Why this becomes a problem
When HMRC writes demanding payment, it is always a shock if the software still shows nil. Reconciling after the event is harder and more stressful than maintaining a regular check between software balances and HMRC’s view.
Example
A business changes VAT return dates with HMRC but not in the software. Several payments are allocated to the wrong period internally, so the VAT control account keeps returning to zero while HMRC shows an accumulating underpayment. The first sign of trouble is a penalty letter.
23. Using bank deposits as turnover for VAT returns
Applies to: E-commerce, retail and hospitality businesses
Card machine payouts and platform settlements are not the same as turnover. They are usually net of fees, and sometimes include chargebacks and refunds. Treating whatever lands in the bank as sales leads to understated income and VAT.
Why this is serious
- VAT is owed on the gross sale value, not on the net amount received after fees.
- Payment processors can supply HMRC with gross sales data.
- Under-declaration is treated as a compliance issue, not a rounding difference.
Example
£9,500 hits the bank from a card provider, but the true sales before fees were £10,000. The missing £500 represents card charges and other adjustments. VAT is due on the full £10,000, not just the £9,500 received.
24. CIS errors when acting as both contractor and subcontractor
Applies to: Construction businesses
Many construction businesses operate in both roles: they are paid under CIS by larger contractors, and they themselves pay smaller subcontractors. The rules treat these roles separately, and failing to register for both can create gaps.
What goes wrong
- Incorrect or missing deductions when paying subcontractors.
- Refunds of CIS suffered claimed incorrectly or in the wrong entity.
- Wrong CIS status applied to workers because roles were not clearly understood.
- Monthly returns submitted late or missing entirely.
Example
A business registers as a subcontractor but not as a contractor. It begins paying its own subcontractors gross, believing its existing registration is enough. Months later, it discovers it should have been withholding CIS and filing monthly returns, with penalties now due.
25. Misstating revenue in multi stage contracts
Applies to: Construction, professional services and creative agencies
Multi stage projects often involve deposits, stage invoices and retention. Revenue should reflect work performed, not simply cash received. When invoicing patterns are used as a shortcut for revenue recognition, profit can fall into the wrong period.
Why this matters
- Profit may be recognised too early or too late compared with when work was actually done.
- VAT timing becomes inconsistent if invoicing does not match progress.
- HMRC examines project based businesses carefully for signs of timing manipulation.
Example
A marketing firm invoices 50% of a large project upfront but does no meaningful work for two months. Recognising the full 50% as revenue immediately inflates early profit. When work is delayed or cancelled, the accounts no longer reflect what was genuinely earned.
How Greater London Bookkeepers can help?
These issues are not simply bookkeeping quirks. They affect tax, compliance and how credible your financial information appears to anyone reviewing it. We work with clients to unpack the underlying causes, restore accuracy and create processes that prevent the same problems returning.
Our role is to identify these high risk patterns early, clean up existing records and put in place a structure that supports UK GAAP reporting and good governance. That can include:
- Re-mapping income streams so card, platform and bank data reconcile properly.
- Bringing VAT, PAYE, CIS and tax balances into line with HMRC’s records.
- Clarifying director’s loans, dividends and inter-company balances.
- Designing practical routines for WIP, stock, deposits and long-term contracts.
If you recognise some of the issues above in your own business, you do not need to fix everything at once. A structured review can prioritise what matters most for your next set of accounts and your current HMRC position. You can outline your situation on our contact page.
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