Personal expenses paid with company money

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When a partner pays a private expense with company money, both the company and the partner are taking a tax risk.

Avoid these situations and see how to act so as not to get into trouble.

Many businessmen abuse these practices thinking that the tax authorities will not detect them, but the tax authorities often discover them.

Typical situations

Use and abuse

Example 1

A company has established its domicile in the home of the main partner and his family, deducting as an expense the bills for rent, maintenance, etc.

However, a visit by a tax agent revealed the deception (the agent was attended by a domestic worker and there was no evidence of any economic activity in the property), resulting in a significant tax liability for the company in question.

Example 2

A businessman furnished his home and asked for the invoice to be issued in the name of the company.

As the issuer was a company that did not normally sell office furniture, the tax authorities requested information on the place of delivery of the furniture and were able to prove that the furniture was not used by the company.

Example 3

In other cases it will be more difficult for the tax authorities to detect this deviation of expenditure.

For example, if a businessman occasionally uses some of his company’s employees to carry out work at his private home, or if a moderate invoice for a home improvement is accounted for by the company.

However, the Inspectorate has the means to detect these operations.

For example, it can send requests for information to the professional who has performed the service so that he/she can explain where the service was provided.

This is a piece of information with tax implications derived from his professional relations with other people, and he is therefore obliged to provide it [LGT, art. 93].

Tax implications

Linked Operation

In case the company deducts such expenses – or depreciations of assets that are actually used by a partner – the tax authorities will regularise the situation: they will consider it as a linked transaction and qualify it as a profit transfer from the company to the partner.

Thus:

It will consider that the expense computed by the partnership is not deductible.
Furthermore, it will consider that the shareholder has obtained a dividend in a disguised manner, which he has not declared, and will make him pay tax on it.

Transactions carried out between a company and partners with a shareholding of 25% or more are considered to be related [LIS, art. 18].

Example

The owner of a company and his family went on a tourist trip to Brazil, with a total cost of 20,000 euros.

Taking advantage of the fact that the company has clients in that territory, he computed that sum as a company expense, but the tax authorities have detected the private destination of the operation and propose the following regularisation:

It considers the 20,000 euros to be a profit of the company passed on to the partner (a dividend).
As such a dividend, it is a non-deductible expense, so it demands 5,000 euros of corporate income tax (25% of 20,000 euros).
In addition, the dividend is computed as income for the shareholder, income that goes to the savings base of the IRPF and is taxed at a rate of between 19 and 28% (depending on the volume of income that is computed as savings income).

Recommendation

Declare the expenditure as an advance

If you have paid for private expenses with company money, to avoid problems with the tax authorities, it is best to separate them from the other expenses that are deductible and tell your accountant to book them separately, as if they were a loan or an advance given to you by the company.

Also, pay these amounts over a reasonable period of time, taking advantage of the amounts you receive from the company (monthly salaries, bonuses and profit payments, possible dividends…).

Inconveniences

If the balance of these “advances” is very high and you cannot pay them off in the short term, it is not a problem that they remain on the company’s balance sheet as a debt owed by the partner to the company (a loan).

However:

You will have to settle interest on this loan, interest which, although it will be counted as an income in the partnership, will not be deductible in your IRPF.
In general, the existence of debts owed by the partners is not well regarded by financial institutions when granting financing to companies.

Credit card use

Small disbursements

Administrator’s expenses

The company card is a good solution to control the small disbursements that you, as the owner of your business, make in your dealings with customers and suppliers.

Your accountant will receive the bank statement once a month, and on that basis you can post the expenses to the appropriate accounts.

But this monthly settlement is not enough:

You must also draw up a statement of the expenses incurred and attach supporting documents. For an expense to be tax-deductible for your company, it must be supported by an invoice (or a receipt for small hotel expenses or tolls). A credit card statement is not enough!
If you also want to deduct the input VAT on these expenses (e.g. for a hotel stay), the supporting document must in any case be an invoice in the name of the company. In general, VAT is only deductible if you have such a document!

Activity-related expenses?

On the other hand, the expenses incurred must be related to the activity, and their amount must be reasonable and appropriate to the size and activity of the company.

If you invite a customer to a nice restaurant, for example, keep evidence that you actually invited him and not someone else (perhaps you signed an important order that day, or you can prove with parking or toll receipts that you travelled to the municipality where the customer is domiciled that day).

Expenses for invitations to customers are tax deductible up to a limit of 1% of the company’s turnover.

In any case, this 1% must be documented and related to the activity [LIS, art. 15].

Limits

Controls

But over time the controls relax, and you may start to use the card for private payments (first cautiously, then regularly).

Don’t overdo it, as the tax authorities will often check these expenses in the event of an inspection:

If the payments made with the card are reasonable, perhaps the inspector will not bother to check them one by one and will accept them as a business expense. For this purpose, consider the 1% indicated above as a reasonable limit (although this does not guarantee that an inspection will not review them).
If the expenses on the card are significant, the inspectorate will review them thoroughly and will be restrictive (and will probably end up rejecting not only individual expenses but also some expenses that are actually business expenses). They may also impose additional penalties (of between 50 and 150% of the amount not paid).

Recommendations

It is best to use the card only to pay for invitations to clients.

To prevent the tax authorities from focusing on the expenses made with the card, take precautions:

Do not use it in shops. These transactions attract attention. Gifts to customers are usually made through specialised companies, which invoice the company directly.
Avoid using them on public holidays or non-working days. An inspector may accept that you have invited a customer on a Saturday, but if such invitations are repeated too often, he may dispute all expenses and not accept any.

If you pay for private expenses with company money, count them as advances or loans in your favour.

Clear these balances promptly and on a regular basis to reduce the chances of them being audited by the tax authorities.