You Can Bank On It

The Business of Writing – You Can Bank On It

Has your writing business come of age? Simon Whaley looks at when to get a business bank account.

We all remember our first time. It was 1989, I was 18, and I couldn’t believe what I was holding in my hands. (It was a postal order for £3.50, in case you were wondering.)

Writing Magazine – April 2020

That was the payment for my first published piece – a word search puzzle. Little did I know then how that would be the first of many, many more payments.

But even then, I knew it would be sensible to keep this income separate from my personal income. What I needed was a separate bank account for my writing business.

Business Legalities

If you establish a limited company or a partnership in the UK, then you are creating a new legal identity. By law, any such business must have a separate bank account in that same name.

However, as writers that’s way beyond the realms of most of us. Limited companies may be the way some writers go, but that’s for highly successful creatives like JK Rowling.

The rest of us are sole traders, which means we operate our writing business in our own name. Therefore, there is no law that compels us to open a separate bank account in our own name.

However, it’s not as simple as that. HMRC’s A General Guide to Keeping Records For Your Tax Return says, ‘If you do not have a separate business bank account, you need to keep records of which transactions were personal and which were business. Unless your business is small or has few transactions, it would usually be helpful to maintain a separate bank account or accounts for the business.’

Mixing personal with business payments in a single bank account could mean we don’t pay the right tax. And if it results in an HMRC investigation, that could result in being fined for poor record keeping.

Matt Dickinson, spokesperson for the Federation of Small Businesses agrees. ‘Generally speaking, it’s a good idea to open a business account as soon as possible to keep finances orderly and clear.’

It’s also important to remember the Government’s Making Tax Digital (MTD) policy, which aims to streamline HMRC’s tax collection service. Originally, the Government planned introducing this for income tax in 2020. This would have affected writers. However, in March 2019, the then Chancellor Philip Hammond announced that the government would delay the introduction of MTD until after 2020.

So, although Making Tax Digital is not looming on the immediate horizon, having a separate bank account for our writing business will make the transition easier when it does eventually happen.

Two years ago, in the February 2018 issue of Writing Magazine when I last looked at Making Tax Digital, consultant Barry Kernon at accountants HW Fisher and Company said, ‘I think for many people it would be a good idea to organise their affairs so that self-employed income and expenses go through one bank account.’

Therefore, having a separate bank account for our writing income and expenses is definitely a sensible decision to take.

Business Bank Accounts

So, the next question is, do we need to have a business bank account, or can we simply open a second personal bank account?

A survey commissioned by accounting software company Intuit Quickbooks in 2016, revealed that 75% of sole trader businesses use a personal bank account for their business transactions.

That’s despite the fact that this often goes against the terms and conditions of personal accounts. Barclays Bank’s terms and conditions state that a personal current account is, ‘for your personal use and not for money relating to any business you run. We can close an account (or stop providing a service) if we find out you are using it for non-personal use, or are not eligible for it.’

The Royal Bank of Scotland’s personal current account terms clearly state, ‘Your account must not be used for business purposes.’

Similarly, Lloyds Bank’s terms and conditions state that, ‘you must not open or use a personal account to hold money for … the purpose of a business, club, charity or other organisation.’

Running your writing business through a personal current account is risky. If your bank spots this they have the right to close the account for breaching the terms and conditions.

Free Banking, or Fee Banking?

As personal customers, we’re used to free banking. Business bank accounts are different. The High Street banks charge monthly administration fees as well as individual transaction fees for the number of credits and debits passing through a business account, or the number of electronic transfers.

Even if you don’t bank any royalty cheques, or incur any writing expenses, the account will still incur the monthly fee.

Monthly account fees are not insignificant, and can start from £6, whilst individual transaction fees can range from under 50p for an electronic transaction, to £1.50 for every cheque paid into your account.

These charges can quickly mount. If you were to bank two cheques for your writing sales totalling £200 in one month, you could end up paying £9 in charges: a £6 monthly fee and an additional £3 in transaction charges. That’s 4.5% of that £200 income.

Naturally, these fees put off a lot of writers, which is why many sole traders risk using a personal current account and hope not to get caught!

Banks understand that small start-up businesses do not have a lot of money coming in, so many offer free banking for the first few months. This free-banking period ranges from 12 months to up to 30 months, depending upon the bank you approach.

In theory, you could extend the free-banking period by switching banks as each free-banking period comes to an end, but account switchers tend to get shorter free-banking periods (such as 6 months), than the 12 to 30 months that new businesses get.

The problem for many writers is that our income fluctuates on a monthly and an annual basis. It’s difficult to predict how much we’ll need to pay in charges.

And some charges could wipe out the actual income. Amazon will make small payments to self-published writers, especially those enrolled in their Kindle Unlimited programme. It’s not uncommon for Amazon to pay out amounts of less than 10p. If your business bank account charges 50p per credit, that small income could lead to a bigger expense!

Challenger Banks

But all is not lost. The High Street banks are being pressured by new kids on the block, known as Challenger Banks. These are attracting large numbers of businesses, in particular sole traders, like us writers.

Challenger banks were created after the banking crisis, and are designed to shake up the British banking system. Many are Internet-only, which means they don’t have the huge costs of the branch network that traditional banks have to endure. As a result, many of them can offer free business banking facilities, only charging when the number of credits and debits exceed a certain number, or the account balances exceeds several tens of thousands of pounds.

Some sole traders using these accounts pay little or no fees at all.

So if you’ve held off from opening a business bank account because of the costs involved, a challenger bank might be the solution you’ve been looking for.

Services like Revolut, Starling Bank, Mettle, and Tide all offer business bank accounts for free. Other day-to-day transactions like bank transfers and card payments are also free, up to certain limits.

Many of these Internet-only banks also offer extra useful benefits, such as being able to allocate money to various virtual pots. This means whenever you receive a payment you can automatically allocate a percentage of it to your tax pot. That way, you know you’ll always have money set aside to meet your tax bill.

A word of caution, though. Not all of these business accounts are run by banks. Banks are regulated by the Prudential Regulation Authority, and each bank licence safeguards customers to the tune of £85,000 under the Financial Services Compensation Scheme (FSCS). If the bank were to collapse, customer bank accounts are protected up to the £85,000 limit.

However, some of these accounts, like those provided by Tide and Coconut, are not bank accounts but electronic money services. This means they’re not protected by the FSCS.

High Street Challenger

If you’d rather bank with a bricks and mortar financial institution, then there’s another solution on the horizon.

The Nationwide Building Society is planning to launch a business bank account free of monthly fees for self-employed people in the near future.

As Anabel Goncalves explains, ‘We are already investing our members’ money in laying the foundations needed to launch our business current account early in 2020. We have developed a new, dedicated mobile business banking app which allows eligible customers to open a business current account within minutes. We continue to test and refine the experience to maximise usability and to deliver a best-in-class customer experience.’

And the building society also hopes to make it easier for its business bank account customers to accept card and contactless payments directly from customers. That could be useful to writers who regularly attend book fairs or books signings and have to take their own stock and process payments.

So don’t get caught by your bank for using a personal account for your writing business, if the terms and conditions forbids this. Respect your writing business and open up a business bank account for it. It might not cost you as much as you think.

Needing to open a business bank account is part of the coming-of-age process for your writing business.

Business Directory – Branch Directory

Revolut: Basic freelancer account is fee-free, with limited free transactions.

Starling Bank: No monthly fees, free electronic payments, domestic transfers and ATM withdrawals.

Mettle: No monthly fees or transaction charges for sole trader accounts with less than £50,000. E-money licence, not a banking licence.

Tide: No monthly or annual fees. Free card payments. Free transfers between Tide accounts. Electronic transfers 20p, ATM withdrawals £1, cash deposits at Post Office £1. E-money licence, not a banking licence.