Dear Contractor Doctor
I am an engineering contractor and frequently find myself working on client sites all over the UK, Europe and the Middle East.
Sometimes I withdraw cash from the company account, direct from the bank or via my company card, and use it for a combination of business and personal purchases.
Can I withdraw personal cash from my limited company bank account?
Contractor Doctor says:
“Contractors can use cash from their limited company’s bank account for business and personal expenses as long as they maintain detailed records, and pay back the personal element,” explains James Abbott, founder and head of tax at contractor accountant Abbott Moore.
“Using company cash is not normally the preferred method for contractors to use when paying for business and personal expenses. It is not so much that using cash is the problem, but that paperwork often gets forgotten.”
If you draw it out for personal expenses, pay it back
Abbott highlights that if a contractor has to use cash to pay for personal expenses withdrawn from the company bank account, the preferred solution is for the contractor to pay it back using their personal account.
“There are situations when a contractor might have to use company cash or a company debit or credit card to pay for personal expenses,” he says. “If this occurs, the cleanest way of accounting for the money is for the contractor to repay the money from their personal account as soon as possible.”
Accountants and bookkeepers are required by the Proceeds of Crime Act (POCA) to report suspicious transactions made by their clients to the NCA (National Crime Agency)
James Abbott, Abbott Moore
Legitimate business expenses paid for using company cash can of course be processed using an expenses form, as long as the contractor has retained receipts and invoices for the costs incurred.
Director’s loan accounts and keeping the paperwork correct
Abbott suggests that another short-term option is to allocate the cash expenditure against the director’s loan account of the contractor.
“The director’s loan account can be cleared when declaring a dividend. The contractor should create dividend vouchers as usual, but subtract the amount in the loan account from the cash paid as a dividend.”
It is very important that contractors using this route to repay cash advances from their company account keep meticulous records, as HMRC could reclassify the payments to the contractor as salary, which would attract income tax and National Insurance Contributions (NICs) liabilities.
Avoid dealing with large amounts of cash
Unless there is a good reason, such as a lengthy business trip requiring large amounts of foreign currency that must be paid for or carried in cash, Abbott warns contractors not to deal in major cash transactions.
“Accountants and bookkeepers are required by the Proceeds of Crime Act (POCA) to report suspicious transactions made by their clients to the NCA (National Crime Agency). For example, a contractor drawing out £10,000 in cash from the business account would ring alarm bells, no matter how innocent and legitimate the reason.”
Banks also have automated processes and mechanisms of risk profiling transactions such as large cash withdrawals from a contractor’s business account that may be reported to the NCA..
Abbott concludes: “If a contractor spends £150 on their company card in a computer store on equipment, it is easy to confirm the reason for the expense. If they spend £150 in cash drawn from the company bank account, then it is harder to prove where the money went.”
In general, it’s best for limited company contractors to keep their personal and business spending separate. But when it is done, meticulous records should be kept, particularly if the contractor is not intending to pay it back for a while.