The Bounce Back Loan Scheme from the Government was in place until 31 March 2021. It was designed to provide support for businesses during the pandemic. Businesses could apply for loans of up to £50,000 or a quarter of their turnover – or the lower amount, all of which can be repaid over 6 or 10 years. The government would also pay the interest for the 1st 12 months.
The Aim of the Scheme
In some cases, directors would have needed to withdraw money in order to live and handle personal costs, however, the loan was not intended for this and that also includes covering director loans. If the bank recognised that this is how the loan was being used then they would have a legal duty to report this to the National Crime Agency. There are others who might be legally obliged to report these incidents such as the accountant of the company.
Salary and Dividends
Commonly, directors will make use of salaries, bonuses or dividends. Under the BBLS, a salary is allowed as it is considered as working capital. However, directors are only permitted to take the right amount for National Insurance purposes but it is likely that they would have taken that prior to taking the loan. As a result, any payment would be made as a dividend although this can only be done from profits that are suitable for the purpose such as realised profits or accumulated profits. A dividend can be paid in a period where losses have been made but only if there were suitable profits retained over previous years that were available. If there were no profits then the dividend would be considered illegal.
Therefore, the company could face a significant tax bill if the loan is used for personal reasons and not paid into the company bank account within 9 months and 1 day after the year-end of the company.
If the money from the loan is withdrawn, this would mean that the loan account becomes overdrawn and if a dividend cannot be taken because there are no reserves then the loan has to be repaid within the period of 9 months and 1 day. Failure to do so would mean a tax bill of 32.5%. If the loan is repaid later then this will mean that the tax is repaid.
The individual taking out the loan might also be responsible under the beneficial loan provisions where the director’s account has an outstanding balance of a minimum of £10,000 at any point during the tax year. However, it’s possible to avoid the charge if payment of interest on the loan is made at the official rate of 2%.
Where issues that relate to improper use of the loan, as well as the non-payment of the loan arise, is when the company goes into liquidation. This will result in insolvency practitioners looking into how the loan was used, particularly if it was used and dividends were taken just after. This could indicate that the money was used and that there could be unreleased profits within the company that could have been used for dividends and that would make the withdrawal illegal.