CORONAVIRUS - TAX - 28.05.2020

Use a bounce back loan to pay yourself?

Our subscriber’s business recently received a bounce back loan (BBL). The money is sitting in the firm’s account. He wants to know if he can use the money to pay himself so he can pay personal bills. If yes, what are the tax consequences?

Bounce back loans

We recently brought you news about the government’s “bounce back loans” (BBLs) ( yr.21, iss.16, pg.1 , see The next step ). Since then it has answered some of the questions that inevitably cropped up following the scheme’s announcement. However, these didn’t tell our subscriber what he most wanted to know; are there restrictions on how the money can be used?

Money in the bank

Generally, businesses have found the BBL application process simple and the outcome satisfactory, with money arriving in the business bank account within a day or two. The quick turnaround caught our subscriber on the hop as he hadn’t decided exactly how to allocate the cash. But, after settling suppliers’ bills he was left with several thousand pounds in the bank. He could hold onto to this to pay future business debts but he wanted to settle more pressing personal bills that had accumulated because he had taken less pay from the company. Could he use the BBL money to reinstate his salary and use it to pay the bills?

Tip. The government has confirmed that BBLs can be used to meet the cost of salaries, including those for owner managers. However, they should only be used to pay or reinstate the usual level of salary and not to increase it. The trouble is, this might be of little or no help for director shareholders who have a low salary and take most of their income as dividends. Trap. PAYE tax and NI must be accounted for as usual for salaries funded by BBLs. It doesn’t matter what the source of funds is, the usual payroll procedures apply.

Can you pay dividends with BBL funds?

The short answer to this question is “yes”. But before you go ahead remember that the usual conditions for paying a dividend apply. These require that your company has profits at least equal to the dividends you pay. Given the current trading conditions that might be awkward. Therefore, you or your bookkeeper will need to produce up-to-date figures (management accounts) to check if the company has enough profits.

Tip. Profits from earlier years which haven’t been paid out, i.e. reserves/retained profits (check the balance sheet of your company’s most recent accounts for these) count when checking if there’s enough profit to fund a dividend. Trap. For 2020/21 the usual tax liabilities for dividends are, broadly, tax at 0% on the first £2,000 of your total dividend income, 7.5% on dividends which fall in your basic rate tax band, 32.5% for those falling in the higher rate band and 38.1% where the additional rate applies to your income.

Insufficient salary or dividends

If, like our subscriber, salary or dividends aren’t possible because of the limitations explained above there’s always a loan. A BBL can be used as the source of funds to allow your company to lend you cash. There are no immediate tax or NI consequences of this, and those that can arise in the longer term are relatively modest (see The next step ).

For a previous article on BBLs and information about borrowing from your business, visit http://tipsandadvice-business.co.uk/download (CD  21.17.03).

BBLs can be used by businesses to fund payments to business owner managers, e.g. salaries up to their usual rate, who can then use the money to settle their bills. Alternatively, BBLs can also be used to fund a loan or pay a dividend to a director shareholder, as long as the company has profits at least equal to the dividend.

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