Bounce Back Loan Scheme – Be aware of the pitfalls

When the Chancellor introduced the Bounce Back Loan Scheme (“BBLS”) there was a collective sigh of relief from businesses who had not been able to access the Coronavirus Business Interruption Loan Scheme (“CBILS”). The BBLS offers six year loans, with a payment holiday for the first 12 months in most cases. However, as monies have been lent without the usual viability checks, there are now concerns that at least 40% of borrowers will default in the event of the economy not recovering as quickly as it is hoped.

The BBLS is not a grant

The loan has to be repaid. It might be covered by a 100% guarantee from the UK Government, but that does not mean that it is ‘free money’. If you have borrowed the money, you will need to factor in the repayments when they come into play. Any default on the loan repayments will register on your company’s credit rating and it may affect your ability to borrow additional funds in the future. However, there is the benefit that there is no requirement for security or a personal guarantee – it is purely an unsecured loan.

It has been introduced to help businesses survive

The idea of the BBLS is that it is used to help meet the working capital requirements of the business. You can use it to pay existing suppliers, pay salaries or even have it as a cash pot to dip into, as and when you need it. You should not use it to increase people’s salaries during this time but you can use the money to pay for general running costs of the business.

My personal income as a director is limited at the moment – can I use it to pay myself?

As above, you can use the money from the BBLS to meet the cost of salaries, including the directors. There has been a suggestion in the media that you can use the cash to pay yourself a dividend, however, you can only pay yourself a dividend if there are sufficient reserves to do so, therefore, if you have minimal retained earnings, or if you have been loss-making, the chances are that you will not be able to pay yourself a dividend. In the event that you do decide to pay yourself a dividend without there being sufficient reserves in hand this dividend will be deemed to be illegal. There are implications with this, in particular there is a risk that HMRC could reclassify this as salary subject to PAYE and NIC and, if your business subsequently enters liquidation, the Liquidator will have the power to ask you to repay those monies.

Can I borrow the money from the company instead?

Any funds received for a BBLS are paid to the company and are therefore company monies. You can borrow money from the company if you are a director and the company’s memorandum and articles of association allow you to do so. However, this comes with a major caveat – if the money has not been repaid within 9 months and one day from the end of the period for Corporation Tax, the company will be liable to pay additional tax of 32.5%, which is £16,250 on a £50,000 loan. The tax will be repaid by HMRC upon the loan being repaid to the company by the director.

In addition to the 32.5% tax rate, any loan over £10k which is interest free is also subject to the Benefit in Kind rules and will need to be included on a P11D. There will then also be an impact on the director’s own personal tax too.

Remember that you have an overriding fiduciary duty to the business

As a director, you have a duty to act in the best interest of the business. If the business fails and enters into an insolvency process, the office-holder will be required to review the directors’ conduct in the lead up to the insolvency event. If it can be demonstrated that you have not acted in the best interests of the company, there is potential for a misfeasance claim, which comes into play when you breach your fiduciary duty as a director.

In conclusion

Whilst the BBLS is a good addition to the financing options being supported by the Government, you should seek advice from your professional advisers, especially if you are intending upon using the monies to boost your own income as a director during this period. You should also seek assistance if you are concerned about the viability of your business to ensure that you follow the appropriate procedures where there is a potential that your business will fail. Please get in touch with our Tax team to talk about the tax implications of the BBLS loan or get in touch with our Restructuring, Recovery and Insolvency team if you are concerned about the viability of your business.