What is a Bounce Back Loan
Bounce back loans are one of the many packages of financial support available for those businesses that have suffered as a result of Covid.
You can apply for a Bounce Back Loan if your business:
- is based in the UK
- was established before 1 March 2020
- has been adversely impacted by the coronavirus
The purpose of the loan is to help the business to bounce back to good trading – clue is in the title!
Economic Benefit for the Business
The ICAEW say that a condition of the loan is that it “will not be used for personal purposes but as an economic benefit for the business”.
It’s not for illegal dividends
When you make a dividend payment from your limited company you need to ensure that you’ve sufficient funds available to do so. Otherwise the dividend could be “illegal” which could cause a number of issues later down the track.
So it stands to reason that the Bounce Back Loan cannot be used to pay out dividends to the shareholders if by doing so an illegal distribution would have been made.
Legal dividends can be made if, at the time that the dividend is declared, there are Distributable Profits. The way to find out if you have distributable profits is to refer to the accounts.
Profits available to take as dividends (Distributable Profits) = Distributable profits + Retained Profits brought forward less dividends taken this year
Of course if this is a negative figure then you have no available profits to take as a dividend. Any dividend payments at this stage will be illegal.
This is explained in full at:
https://www.cheapaccounting.co.uk/blog/index.php/quick-tax-tip-avoid-making-an-illegal-dividend/
Simply put if you’ve already taken out all of the profits from the business then you cannot take out more just because the loan has landed into your bank account.
Salary
However you can use the Bounce Back Loan to pay salaries which are allowable business costs, although this may attract tax and national insurance.
That said the loan must be used for the economic benefit of the business. So if you’re working in the business then this would seem to fulfil that loan condition. However if you’re not working in the business then it would be difficult to claim that loan condition was met and so salaries for those not working in the business would be hard to justify..
Buying a Car
The loan could be used to buy a company (not personal) car if the vehicle is something that would bring economic benefit to the business.
However the loan certainly could not be used to buy a personal car as that clearly breaches the condition that the loan will not be used for personal purposes!
Beware – this can bite you
The attractiveness of the Bounce Back Loan is without doubt – 6 year term, no repayments in the first year and 2.5% interest.
However the conditions of the loan are clear and should not be breached in any circumstances.
I suspect we’ll see some auditing of the loan scheme and penalties applied, or the loan recalled, where breaches of conditions have occurred.