How Bounce Back Loan Payments Can Land You in Hot Water with HMRC

7th May 2021
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How Bounce Back Loan Payments Can Land You in Hot Water with HMRC

The Bounce Back Loan Scheme (BBLS) has been a financial lifeline for many businesses during the pandemic. But some claimants have come a little unstuck...

It’s all in the small print

Unveiled back in May 2020, the Bounce Back Loan Scheme (BBLS) was designed by the government as a temporary, emergency measure to financially support businesses through the COVID-19 pandemic. The loans are not repayable during the first 12 months, no interest is charged, and they’re 100% state-backed. This made them an extremely attractive option for struggling companies.

More than 1.5 million UK businesses applied for a Bounce Back Loan before the scheme was closed to applications on the 31st March 2021. A maximum of £50,000 could be borrowed, but the exact amount largely depended on the size and previous turnover of the business.

The BBLS has been broadly welcomed, and for many small businesses the loans made the difference between surviving and not. However, with Bounce Back Loans now having been in existence for a year certain legal issues are now coming to light. Indeed, some claimants are discovering they could end up in hot water with HMRC. Often for misunderstanding what their Bounce Back Loan was for, and what it could be spent on.

The devil is in the detail

Unlike the SEISS scheme for self-employed individuals, for example, Bounce Back Loans need to be repaid. They’re not a grant. Various lenders took part in the programme, each with its own set of (slightly varying) terms and conditions. This made reading the small print all the more important. Unfortunately, some claimants are finding this out the tough way.

Some conditions have been very common across lenders, including:

  • Businesses that have already received a loan under the Coronavirus Business Interruption Loan Scheme (CBILS), the Coronavirus Large Business Interruption Loan Scheme (CLBILS) or the COVID-19 Corporate Financing Facility (CCFF) are ineligible for a Bounce Back Loan. The only proviso to this is if they were looking to refinance it in full with the Bounce Back Loan.
  • 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. Again, anyone found using a Bounce Back Loan to make a non-business purchase is likely to end up in trouble.
  • One application is allowed per ‘group’. So if multiple businesses exist in a group, and more than one of them has applied for a Bounce Back Loan, then this is technically fraud.

The other important point to mention here is that businesses that have previously benefited from a Bounce Back Loan must be extremely careful about taking on other forms of debt whilst the BBL is still in existence. The reason for this is because some lenders explicitly say further debt is not allowed. Some claimants are only just discovering the impact of this as their credit options are cut off.

But where company money ends and personal money begins isn’t always clear

We really want to hammer this point home: the idea behind Bounce Back Loans was never about boosting personal money. This is still the case even if a claimant has every intention of paying it off.

Liquidators are often coming across directors of insolvent limited companies who have made this exact mistake. It soon hits home hard when many thousands of pounds worth of transactions suddenly need to be paid back, often with interest.

Trading difficulties and solvency

Thanks to the favourable terms of Bounce Back Loans, some business owners have chosen to pay back loans from themselves to their business. Others have instead borrowed money from the company.

This puts the claimant in a tricky situation should the business later experience trading difficulties. Why? Because those that do are likely to be placed in a formal insolvency process, and part of this process involves insolvency practitioners needing to know precisely when the business was last solvent. All business activities will then be reviewed so that the reason for the business failure can be determined. This is incredibly difficult if the lines have been blurred.

What’s the score with salaries and dividends?

In a literal sense, Bounce Back Loans can in fact be paid as a dividend. However, this would only be the case if the business is cash poor, despite having retained dividends. So like many things finance-related, it’s not as easy as it first appears.

Taking a dividend from a company that is at risk of insolvency due to being cash poor is not an advisable move: If the company becomes insolvent, any dividends would need to be repaid.

With regards to salaries, any PAYE salary needs to be reasonable. Salaries that are especially large could be deemed ‘excessive’ and - if the company was to become insolvent - attract the attention of an insolvency practitioner. So fair and reasonable salaries are fine, but paying substantial ones with a BBL is risky.

A good way of looking at it is like this: Bounce Back Loans were created for the business to benefit, not specific individuals. As a proactive accountant, it’s worth being aware of clients that may have an issue here and tackling it before problems arise.

Partnering with our Tax Cloud team

Perhaps your clients want to know how their Bounce Back Loan or other government financial assistance will affect their R&D Tax Credits claim? Or maybe you just want to better understand the intricacies of R&D Tax Credits and R&D Grants so you can advise them better? This is where our team can help.

Throughout our two decades in the R&D Tax Relief industry, we have worked with a wide variety of companies and accountancy firms to put together highly accurate, optimised R&D tax relief claims without any hassle.

When your firm partners with us, we will work with both yourself and your client to understand their R&D goals and how these plans can be financed. Essentially, we take the stress out of R&D tax relief claims so you can focus on everything else.

R&D tax and funding is all we do. So, for you and your clients, it’s one less thing to worry about. And, as all our services are offered remotely via video call, email and phone call, you don’t even need to leave your home or office.

Feel free to get in touch via our webform or call our expert advisors on 0207 118 6045.