OK, maybe ‘trap’ is a bit too dramatic, but the ‘General Expenses’ account can present difficulties at year end if it is used too liberally throughout the financial year.
We see this issue arising on a fairly regular basis among our fellow Xero users, so we decided to write a post addressing one of the ways in which the overuse of this account can adversely affect your company’s tax return.
Why your account-level data matters to HMRC
When you file your company tax return with HMRC you have to include what is commonly referred to as the Detailed Profit and Loss. This report provides a level of analysis that is typically similar to that available in Xero’s standard Profit & Loss report.
There are a number of rules that govern what kinds of company expenses are tax deductible and one of the things that HMRC wants to be able to do is to look at this Detailed Profit and Loss to help verify that no mistakes have been made in applying these rules.
If your expenses are neatly placed into well described accounts in your Xero system then there is a very good chance that your Detailed Profit and Loss, whether produced by yourself, Instafile or your accountant, will also be similarly transparent and easy for HMRC to use.
What can go wrong
Alternatively, if you have put 25% of your operating costs into one account called ‘General Expenses’ then you are unintentionally making it more difficult for HMRC to derive a clear picture of your business operations and this, in turn, may reduce their level of confidence in the accuracy of your tax return.
Furthermore, you’re also at risk of looking like you might be deliberately trying to obfuscate some of your costs for the purpose of concealment.
I’m not suggesting that any of our fellow Xero users are using the ‘General Expenses’ account for such nefarious purposes. The point is that by restricting its use to transactions with small values you will make your year end process easier and more robust. A pleasant corollary of this is that you will also end up with better quality management accounts!
How to get it right
If you are struggling with a ‘General Expenses’ account that already has a relatively high balance then it might be worth looking at re-coding the transactions into other accounts. And if you want to avoid getting into that situation in the first place then we’d highly recommend you use Xero’s ‘Bank Rules’ feature to help auto-code as many of your regular transaction types as possible.
If you use Instafile to file your accounts and you need a bit of help with your ‘General Expenses’ then please do not hesitate to get in touch with us. We’re always happy to help out where we can.