26. Ignoring the asset and liability behind finance agreements
Applies to: Any business using hire purchase, asset finance or vehicle finance
Many businesses only record the monthly payment from a finance deal and forget about the asset (van, machine, equipment) and the loan that actually sit behind it. The cash outflow is visible, but the balance sheet never shows what was bought or what is still owed.
Why this becomes serious
- The business appears to own fewer assets than it really does, which undervalues the balance sheet.
- Interest is understated, so profit looks stronger than it should.
- Solvency and gearing ratios that banks and lenders care about become misleading.
- Year-end accounts look unsophisticated when there are several finance agreements but no loan balances.
Example
A van on a four year hire purchase agreement appears nowhere in the accounts. To anyone reading the balance sheet, the business does not own a van, yet £400 per month leaves the bank. It looks like unexplained leakage rather than a well financed asset.
27. Using cash accounting internally when you need accruals
Applies to: Limited companies or businesses preparing statutory accounts
Cash accounting feels straightforward: money in equals income, money out equals cost. Statutory accounts under UK GAAP work on an accrual basis, where income and costs are matched to when the work is done rather than when the cash moves. Using cash thinking all year and trying to convert everything at year-end creates real distortion.
Why this creates problems
- Profit stops reflecting actual performance and simply mirrors bank movements.
- VAT timings can diverge from accounting timings, leading to confusing differences.
- Year-end turns into a rebuild exercise, converting months of cash based data into accrual numbers.
- Directors make decisions based on distorted figures, for example assuming a bad month when invoices simply have not been paid yet.
Example
A business bills £50,000 in March but gets paid in May. On a pure cash basis, March looks poor and May looks excellent, even though the work was done in March. Performance reviews, bonuses and planning become unreliable because they do not match the timing of the work.
28. Not maintaining statutory registers
Applies to: Limited companies
Shareholder registers, Persons with Significant Control (PSC) registers and director registers are legal records that must exist alongside Companies House filings. They are part of how a company proves who owns and controls it.
Why this matters
- Companies House information does not replace your obligation to hold up to date registers.
- When selling shares or bringing in investors, missing registers make it hard to prove ownership.
- Failure to keep registers is a breach of the Companies Act, even if accounts and tax returns are perfect.
- Lenders, buyers and advisers immediately question governance if the basic legal records are missing.
Example
A company has three shareholders but never maintained a share register. When a buyer appears, no one can prove who legally owns what. The deal stalls while lawyers reconstruct history and may collapse entirely.
29. Destroying records too early
Applies to: VAT registered and incorporated businesses
HMRC usually expects key records such as invoices, receipts, bank statements and contracts to be kept for at least six years. Destroying them early to save space or declutter creates serious problems later if an enquiry arrives.
Why early destruction is a major risk
- Without evidence, HMRC can disallow input VAT and expenses in an enquiry.
- HMRC then reconstructs income and costs using estimates that usually work against you.
- Recreating a missing paper trail from banks and suppliers is time consuming and expensive.
- Losing contracts and agreements leaves you exposed in commercial disputes.
Example
A business shreds all receipts older than twelve months to stay tidy. During a VAT check, HMRC disallows £18,000 of input VAT because the invoices no longer exist. The business may have genuinely incurred the costs, but cannot prove it.
30. Artificially separating businesses to avoid VAT registration
Applies to: Multi entity structures, husband and wife businesses, franchise style setups
Some owners split one economic activity across two or more legal entities so each one stays below the VAT registration threshold. HMRC calls this artificial separation.
Why this is dangerous
If HMRC believes the businesses are actually one combined trade, they can:
- treat them as a single business for VAT purposes, and
- backdate VAT across all relevant years, including interest and penalties.
HMRC looks for indicators such as:
- shared ownership, staff or premises,
- shared customers or branding,
- one website that clearly markets both entities,
- split invoices that make no commercial sense.
Example
A café and adjacent bakery owned by spouses share staff, a kitchen, tills and customers. On paper they are separate, but in practice they are one business. HMRC can treat them as combined and backdate VAT to the point at which total turnover passed the threshold.
31. Misstated going concern because the numbers are wrong
Applies to: Limited companies preparing UK GAAP accounts
Directors must assess whether the company is a going concern, meaning it can continue to trade for at least twelve months. That assessment is only as good as the underlying bookkeeping and forecasts that support it.
Why this becomes serious
- If liabilities are understated or cash flow forecasts are based on bad data, directors may conclude the business is fine when it is not.
- Auditors focus heavily on going concern; errors can lead to modified opinions or extra disclosures.
- If the business later collapses, directors may be criticised for not having recognised the problem sooner.
- Lenders and creditors rely on going concern assessments when deciding whether to extend credit.
Example
Forecasts show three months of cash cover, but £40,000 of creditors were never recorded. The business appears viable on paper but is actually insolvent. That disconnect is exactly what auditors and regulators worry about.
32. Not tracking related party transactions
Applies to: Limited companies
Transactions involving directors, shareholders or connected companies are related party transactions. They must be clearly identified, properly documented and sometimes disclosed in the accounts.
What goes wrong
- Payments to directors are recorded vaguely as miscellaneous and could be salary, loans or benefits.
- Transfers between group companies are undocumented, so no one knows if they are loans, recharges or dividends.
- HMRC treats unclear related party flows as high risk, especially where there are tax or benefit implications.
- Lenders worry that money is being moved around in ways they do not understand.
Example
A director receives £900 per month labelled simply misc. HMRC can argue this is either undeclared salary or a director’s loan. Without proper documentation, the company has no clear position to defend.
33. Missing accrued bonuses, commissions or director pay
Applies to: Businesses with performance related pay or discretionary bonuses
Bonuses and commissions often relate to work done in one year but are not paid until the next. Under UK GAAP, they usually need to be accrued in the year the work was done if the obligation existed at that date.
Why this matters
- Profit is overstated in the year the work happened if the cost is missing.
- Corporation Tax is overpaid for that year and then understated the following year.
- Year on year performance becomes harder to interpret because figures jump around with no real change in activity.
- Key performance indicators and bank covenant calculations based on profit are distorted.
Example
A £15,000 director bonus is earned based on March results but paid in May. If it is not accrued in March, that year’s accounts overstate profit by £15,000 and the following year looks weaker for no operational reason.
34. Incorrect year-end revenue cut off
Applies to: All trading businesses
Cut off problems occur when income belonging to one accounting period is recorded in another, usually around the year-end. A little slippage may seem harmless, but consistent shifts quickly damage credibility.
Why it is serious
- Recording next year’s sales in this year inflates profit artificially.
- Delaying income into next year understates this year’s profit, sometimes deliberately.
- HMRC examines bank and sales activity around the year-end specifically to identify misstatements.
- Even if amounts are modest, a pattern of convenient timing undermines trust.
Example
A business invoices £12,000 on 1 April but records it in March so the year looks better. That is not smoothing, it is misstatement.
35. Treating major repairs as capital, or capital items as repairs
Applies to: Property businesses, construction, landlords
There is a key difference between a repair that keeps an asset in working order and an improvement that enhances or upgrades it. The tax treatment is different, and blurring the two creates longer term problems.
Why misclassification matters
- Over capitalising repairs can delay or reduce tax relief, making tax higher than it needs to be.
- Under capitalising improvements means too much is expensed immediately, understating taxable profit in the short term and overstating it later.
- Asset values become unreliable, affecting balance sheet strength and depreciation.
- HMRC targets property and construction because this area is often mishandled.
Example
Replacing a broken boiler like for like is usually a repair and can often be expensed. Installing an entirely new heating system as an upgrade is usually an improvement and should be treated as capital. Treating all large bills as repairs may feel helpful in the short term but is not compliant.
36. Incorrect VAT treatment of international services
Applies to: Businesses buying or selling cross border services
Rules on place of supply, reverse charge and VAT on digital services changed after Brexit. Many businesses still apply older assumptions without realising, especially when selling into the EU or buying overseas services.
Why this is dangerous
- Charging VAT to overseas customers when you should not can make you uncompetitive and may lead to refunds.
- Failing to account for VAT under the reverse charge can create under declarations and penalties.
- Errors accumulate over many VAT quarters before anyone spots the pattern.
- Cross border services remain a focus area for HMRC.
Example
A UK company supplies digital services to EU consumers but uses UK domestic rules rather than the correct cross border rules. The VAT treatment may be wrong for every sale, not just the occasional one.
37. Not recording provisions or contingent liabilities
Applies to: Any business with warranties, legal disputes, refunds or guarantees
If a business knows that future costs are likely, even if the exact amount is unclear, UK GAAP may require a provision or at least a disclosure. Ignoring these items makes performance look better than it really is.
Why this is high risk
- Profit is overstated if expected costs are simply ignored.
- Creditors and investors get an overly optimistic view of the business.
- HMRC and auditors take a dim view when known risks are omitted from the accounts.
- Problems with customers or legal claims will feel like surprises later even though they were visible earlier.
Example
A company sells £200,000 of goods with a known defect rate and high warranty claims but records no warranty provision at all. On paper, margins look strong; in reality, future warranty costs are waiting just out of sight.
38. Weak controls over company credit cards
Applies to: Businesses with directors or staff using company cards
Company cards make spending easy. Without clear controls and routines, they also make errors, missing evidence and abuse easy.
Risks include
- Missing receipts, which makes VAT hard to reclaim safely.
- Personal spending, which creates unreported benefits in kind and incorrect tax.
- Unusual or unexplained spend, which is a flag for anti money laundering and fraud.
- No clear policy, which leads to inconsistent treatment between staff and periods.
Example
A staff member spends £1,200 per month across online vendors, fuel stations and shops, but cannot produce receipts for six months. HMRC can disallow the input VAT and the company has no way to prove what was genuinely business related.
39. Incorrect treatment of donations, Gift Aid or grants
Applies to: Charities, CICs, not for profits and some limited companies
Donations and grants do not always behave like normal income. Some are taxable, some are not. Some are restricted to specific projects. Getting this wrong causes compliance issues that go beyond bookkeeping.
Why this becomes serious
- Some grants are taxable and others are not; mixing them up leads to incorrect Corporation Tax.
- Restricted funds must be ring fenced and used only for agreed purposes, not general overheads.
- Funders often require detailed reporting; misuse can lead to repayments or being barred from future funding.
- Misreporting damages trust with regulators, donors and the public.
Example
A community interest company receives a £50,000 restricted grant to run a specific project but uses it to pay general office rent and wages instead. If discovered, the grantor can demand the money back and may report the misuse.
40. Poor tracking of capital introduced or drawings
Applies to: Sole traders and partnerships
In unincorporated businesses, money taken out by owners (drawings) is not a business expense. Likewise, personal funds introduced are not income. Confusing the two makes the accounts meaningless as a measure of performance.
Why this is high risk
- Treating drawings as expenses understates profit and tax.
- Unexplained capital introduced makes it hard to answer HMRC questions about where the money came from.
- Partnership capital accounts become impossible to reconcile if movements are not recorded properly.
- Banks cannot see business performance clearly if owner movements blur the picture.
Example
A sole trader withdraws £25,000 labelled miscellaneous across the year. HMRC will want to know what that represents. Miscellaneous is not an answer.
41. Ignoring VAT partial exemption requirements
Applies to: Businesses with both exempt and taxable income
Where a business has some VAT exempt income and some taxable income, rules limit how much input VAT can be reclaimed. Treating all input VAT as recoverable can create a slow growing exposure.
Why this is high risk
- Reclaiming all input VAT when only a proportion is allowed can lead to substantial multi year corrections.
- Calculating partial exemption retrospectively over several years is complex and costly.
- Sectors such as financial services, health, education and property often fall into this category without realising.
- HMRC specifically targets businesses that show both exempt and taxable outputs.
Example
A dental clinic offers exempt clinical work and taxable cosmetic treatments but claims all input VAT on overheads. HMRC can require a calculation over several years and claw back a significant amount of VAT.
42. Getting EC sales, imports and post Brexit VAT wrong
Applies to: Importers, exporters and e-commerce sellers
Changes to import VAT, postponed VAT accounting (PVA), customs declarations and sales into the EU are easy to mishandle, especially where multiple platforms and shipping routes are involved.
Why errors occur
- Accounting software is not always configured for PVA or new VAT codes.
- PVA statements are not downloaded or posted into the accounts.
- E-commerce sales run across several platforms and do not reconcile neatly.
- Old EU rules are still being applied by habit.
Why it matters
These mistakes rarely show as one big error. They build up quietly across many periods, so by the time someone reviews them the exposure can cover years of trading.
43. Misclassifying long term contracts under UK GAAP
Applies to: Construction, manufacturing, professional services
Long term contracts may need revenue recognised based on stage of completion rather than when invoices are raised or cash is received. Getting this wrong can swing reported profit sharply.
Why this is serious
- Recognising revenue too early inflates profit and can mislead lenders or buyers.
- Under recognising work in progress understates assets and hides value.
- HMRC and auditors pay particular attention to sectors where long term contracts are common.
Example
A builder invoices 60% of a contract at the start but has only completed 10% of the work. If they recognise the full 60% as revenue immediately, profit is materially overstated.
44. Not monitoring loan covenants
Applies to: Businesses with loans or asset finance
Loan agreements often contain covenants based on financial ratios or minimum net assets. If the bookkeeping is wrong, you might appear to have breached them even if real performance is acceptable.
Why bookkeeping errors cause real damage
- A technical breach gives banks the right to increase interest rates, restrict borrowing or even demand early repayment.
- Directors may sign certificates confirming covenant compliance based on inaccurate figures.
- Renegotiating facilities is much harder once a bank has lost confidence in your numbers.
45. Not tracking or amortising intangibles
Applies to: Companies with goodwill, intellectual property or purchased software
Intangible assets such as purchased goodwill or software licences must be recorded and amortised in line with UK GAAP. Ignoring them or treating them casually undermines both tax and accounts.
Why it matters
- Ignoring amortisation breaches accounting standards and overstates asset values.
- Over amortising depresses profit and confuses performance trends.
- Buyers and investors may question whether the intangibles are real, properly valued or backed by contracts.
- HMRC may disallow amortisation deductions if the underlying intangible is not properly documented.
46. Treating client money as business money
Applies to: Landlords, agents, solicitors, events businesses and trades holding deposits
Client money such as deposits, service charge funds and funds held on trust is not your income and usually must be held separately. Mixing it with business money creates risks that go beyond normal bookkeeping mistakes.
Why this is serious
- Treating client funds as turnover overstates both revenue and profit.
- Client money rules and professional regulations may be breached, especially in regulated sectors.
- Banks and regulators see commingling of client and business funds as a major governance and anti money laundering red flag.
- When refunds or reconciliations are needed, no one can easily see what still belongs to clients.
Example
An events business takes £18,000 of client funds into its main bank account and immediately uses it to pay its own overheads. If the event is cancelled or disputed, there is no clear separation between the client’s money and the company’s money.
47. Poorly managed director expense claims
Applies to: All companies where directors pay costs personally
Directors often pay for business costs on personal cards and reclaim them later. Without a simple system, this quickly becomes messy and hard to justify.
Why poor tracking is a problem
- VAT reclaims become unsafe if invoices are missing or cannot clearly be tied to the business.
- Large, irregular repayments distort the director’s loan account and create confusion.
- HMRC is likely to question high or unusual reimbursement amounts.
- The true cost of running the business is hidden if director funded items never make it into the accounts correctly.
Example
A director submits a single catch up reimbursement claim for £6,000 covering several months with limited supporting paperwork. That is extremely hard to defend if HMRC asks for detail.
48. Ignoring deferred tax
Applies to: Companies preparing full UK GAAP accounts
Deferred tax reflects timing differences between when profits are recognised in the accounts and when they are taxed. It is not optional in full accounts and can be material even in smaller companies.
Why it matters
- Profit can be significantly overstated or understated if deferred tax is ignored.
- Balance sheets do not show the real future tax impact sitting behind certain items.
- Sophisticated readers such as banks, buyers and auditors see missing deferred tax as a sign that the accounts are not technically robust.
- HMRC may query why your numbers differ from expectations if deferred tax has been omitted.
49. Mishandling construction retentions
Applies to: Construction and related trades
Retentions are amounts held back by customers until work is complete or defects periods end. They are a normal feature of construction but are often poorly tracked and misposted.
Why this causes problems
- Recognising retentions as income too early inflates revenue and profit.
- VAT timing can be incorrect if invoices or self billing arrangements do not match contractual terms.
- Businesses can lose track of old retentions they are still entitled to claim.
- HMRC may query why cash does not match profit where retentions are significant.
Example
A contractor treats all invoiced amounts as final revenue even though five to ten percent is retained for a year. The accounts show profit that may never fully materialise if those retentions are reduced or never claimed.
50. Weak anti fraud controls and unexplained discrepancies
Applies to: All businesses
Fraud rarely appears as a single dramatic event. It usually hides inside weak controls, unreconciled balances and unexplained adjustments. The bookkeeping may not be the cause, but it is often where the warning signs show up first.
Typical signs
- Duplicate or suspicious supplier names.
- Unexpected credit notes or write offs.
- Cash sales that do not match stock movements.
- Journal entries used repeatedly to fix unexplained differences.
- Sudden spikes in expenses or shrinkage without a clear reason.
Why this matters
- Losses build slowly over time and are often only spotted by chance.
- Insurers may refuse fraud claims if basic controls such as approvals and reconciliations were not in place.
- HMRC may treat repeated errors as careless or deliberate behaviour, increasing penalties.
How Greater London Bookkeepers can help
Taken together, these practices change how reliable your business looks to HMRC, banks and potential buyers. They are not minor quirks; they shape decisions about tax, lending and deals long after the original transactions.
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 in Parts 1 and 2, 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.