Launched back in May last year, the government’s Bounce Back Loan scheme was designed as a temporary, emergency measure to financially support businesses during the coronavirus outbreak. The loans are 100% state backed with no repayments or interest due in the first twelve months. As much as £50,000 could be borrowed, depending largely on the size and previous turnover of the business.
Over 1.5 million businesses applied for a Bounce Back Loan before the scheme closed to applications on the 31st March this year.
The scheme has been broadly welcomed, acting as a lifeline for Covid-weary businesses across the country. However, with the scheme having played out for a while now, certain legal problems are becoming apparent. Indeed, some claimants could find themselves in hot water, not least for misunderstanding what the loan can be spent on, and what the consequences are of making a mistake.
The small print
Unlike the SEISS scheme for the self-employed for example, Bounce Back loans are not a grant they are a loan. Each lender’s terms and conditions will vary slightly, so it’s crucial to understand the small print. However, one of the key terms relates to this point.
- The loan must be used for the purposes of continuing to trade during the coronavirus pandemic. It must therefore support a UK-based commercial or trading application – it is not for personal use.
What about dividends and salaries?
The Companies Act 2006 requires that a dividend be paid only if there are sufficient distributable profits. (This means profits after tax). So, if the company is not in profit or has insufficient accumulated profit then it should not be paying dividends.
As bounce back loans are held in company bank accounts there is a risk that some business owners confuse the bank being in credit with the business being profitable. Even if the bank account is in credit the company will need to have sufficient retained profits to cover the dividend at the date of payment.
If a dividend is paid which exceeds the accumulated profits then this is termed ‘ultra vires’ and regarded as illegal.
It is therefore really important that accurate management accounts are used to understand the profitability of the business before dividends are declared.
In regard to salaries, any PAYE salary needs to be reasonable. Should the worse happen and an insolvency situation arises then an excessive salary is likely to be investigated by an insolvency practitioner to determine if directors have acted lawfully.
The terms of Bounce Back Loans are extremely favourable, which again has led to some business owners choosing to pay back loans from themselves to their business. Others have gone down the route of borrowing money from the company as a ‘directors’ loan’.
The rules regarding directors loans are strict, one of the main features of an overdrawn directors loan is that it will attract a tax charge of 32.5% if the loan remains outstanding 9 months after the company year end. This may involve the company paying a significant sum to HMRC. However, if you repay the loan you can claim this tax back although time limits apply. It is therefore advisable to only take a loan if you are confident, it can be repaid within the timescales.
If you’re concerned about anything we’ve raised in this article, or you’d just like to ask a question, Your Finance Team is here to help. Simply call 01737 652 221, drop us an email, or request a call back.