Have you used your ‘bounce back loan’ to pay dividends – is that what it was for?
The Governments Bounce Back Loan Scheme (BBLS) allowed businesses to apply for a loan to support them during the Coronavirus pandemic.
The loans
Bounceback loans were available to businesses until 31 March 2021. A business could apply for a loan of between £2,000 and £50,000, or if lower 25% of the business turnover.
These loans are repayable over six to ten years, with the government paying the first 12 months of interest to the lender.
Has the loan been used for personal purposes?
A critical condition associated with these loans restricts the use of these funds ‘for personal purposes’. This could include paying personal bills, taking the money as a directors loan or removing the money for any personal purpose.
Where a loan has been used for personal purposes the lender has a legal duty to report the fraudulent use of the loan to the National Crime Agency under the anti-money laundering rules. Arrests have already been made by the National Crime Agency where the Bounce Back Loan Scheme has been fraudulently used for personal purposes.
Will I be caught by these rules?
Funds can be drawn from a company in two main ways; though a salary or as a dividend.
Any payments where the bounceback loan has been used as salary (under PAYE) are allowed under the rules. This is because the rules deem the bounceback loan to be ‘working capital’ under tax law.
A potential tax issue arises where a director may be taking the ‘optimum amount’ for tax and National Insurance purposes (being £9,500 for 2021/22 or £12,570 where the employment allowance is available). If the director has drawn more than this amount by the time the bounceback loan was taken the excess over the ‘optimal amount’ will be treated as a dividend payment to the director (where the director is also a shareholder).
Where a significant dividend is taken instead of salary the owner of the business may run into issues regarding the loan. The loan is intended to be used to fund the working capital of the business rather than supplementing the owners income. As a result, some individuals may fall foul of the rules when it comes to bounceback loans.
How to avoid trouble
To avoid any issues, it is best to evidence the working capital payments made using the cash obtained from the bounceback loan.
If dividends have been paid out during the year, the shareholder should be able to prove that this came out of free cash flow and did not involve any ‘dipping’ into the bounceback loan fund.
Where a business has sufficient distributable reserves there should be no issue with a dividend payment being made as the company has sufficient retained profits to make the payment.
Where the company does not have sufficient distributable reserves to make actual or deemed dividend payments there will be additional administrative and tax burdens imposed on the company and the shareholder notwithstanding any action taken by the National Crime Agency as mentioned above.
Conclusion
Using a bounceback loan to pay yourself is not what the legislation intended. To avoid any issues with the National Crime Agency it is advised to keep detailed records where the money was spent. If you need any advice regarding your position relating to a bounceback loan, or how to document the use of this money, please feel free to contact us.