Emma has worked in finance for over 15 years, becoming a self-employed Bookkeeper 11 years ago, and training to become a Certified Accountant before launching B-Able in 2012.
Emma is dedicated to providing her clients with reliable business support.
This is a quick update to explain some consequences of receiving the new 100% Government backed Bounceback Loan, some tips that will help you plan for the future and ensure you survive post-COVID tax bills. The Government have stepped up with billions of pounds of financial assistance, but inevitably this will mean an uncertain future for taxes and the economy as a whole as we head into a financial recession.
We have had discussions last week with some of our clients who have received Bounceback Loans, many receiving the full £50,000 that was on offer. We understand that lots of people are in desperate situations right now, with the prospect of maybe returning to work, but not as you know it, and whatever government funding you have been lucky to receive diminishing by the day. But, please proceed with caution, the Bounceback Loan is clearly defined as a means to provide economic benefit to the business and should not be used for personal expenditure.
If you are a Company Director, in accepting the loan and deciding to withdraw this for personal funds in the form of what you may think is a 'dividend' you could be creating a hefty 32.5% loan charge which won't land until 9 months after your next year end as well as being in breach of the loan terms directly with the lender. A dividend can only be paid from Company profits, or reserves held within the business from previous year profits, and you cannot take a dividend from the loan.
Whilst the terms of this loan are very attractive and we are encouraging all of our clients who meet the criteria to apply for what they need to support their business, you should be aware of the impact this could have on your post-COVID recovery.
Have a good week ahead!
Why can't I pay a dividend from the Loan?
Dividends can only be paid from profit, once tax has been deducted.
The terms of the loan specifically state that this has not to be used for personal expenditure, but this aside, as with any loan that is paid to the business, if you decide to withdraw this from the business for yourself, without processing this as a proper salary, then it needs to be recorded within your accounts as a Directors Loan Account.
In practice, many Directors have an ongoing balance accumulating in the Directors Loan account throughout the year, and then at the end of the year the aim would be to clear any balance with the dividend distributed for that period.
Your profit is subject to corporation tax, at 19%, and then the balance remaining is what you would have to distribute as a dividend (or clear out your directors loan). Anything that isn't taken as a dividend would be added to the Company reserves and this could be withdrawn as a dividend in the future.
When a loan is paid into the business, it would appear on your balance sheet as a creditor, it would be paid into your business bank account, and then as you withdraw the funds the transactions will be logged as part of the bookkeeping process for the business.
If you spend the funds on business expenditure, you will be able to process these expenses in the usual way and receive the tax relief for doing so. The transactions will be listed in your profit and loss, and reduce the profit. There would be no negative tax implications. You would receive tax relief on the value of these items of expenditure.
If you spend the funds on personal expenditure, this value will be recorded against your Directors Loan and you will have two options on how to deal with this;
- Repay the funds you take now at a later date, but no later than 9 months after your year end.
- Accept a 32.5% tax charge, on top of your corporation tax bill for the year, on the balance of the loan that remains outstanding 9 months after your year end. For example, if you owed the business £10,000 at this point, your S455 tax liability would be £3,250. This balance can be reclaimed in part or in full if you repay the loan within 4 years of the date the loan was made.
- If you owe any more than £10,000 at any point in time, that cannot be cleared by a dividend, the Directors Loan will attract a further tax due to the benefit in kind you are receiving for being in debt (an interest free loan), and your limited company will also need to pay a Class 1A National Insurance liability at 13.8% for offering you a beneficial loan.
The terms of the loan specifically state that this has not to be used for personal expenditure, but this aside, as with any loan that is paid to the business, if you decide to withdraw this from the business for yourself, without processing this as a proper salary, then it needs to be recorded within your accounts as a Directors Loan Account.
In practice, many Directors have an ongoing balance accumulating in the Directors Loan account throughout the year, and then at the end of the year the aim would be to clear any balance with the dividend distributed for that period.
Your profit is subject to corporation tax, at 19%, and then the balance remaining is what you would have to distribute as a dividend (or clear out your directors loan). Anything that isn't taken as a dividend would be added to the Company reserves and this could be withdrawn as a dividend in the future.
When a loan is paid into the business, it would appear on your balance sheet as a creditor, it would be paid into your business bank account, and then as you withdraw the funds the transactions will be logged as part of the bookkeeping process for the business.
If you spend the funds on business expenditure, you will be able to process these expenses in the usual way and receive the tax relief for doing so. The transactions will be listed in your profit and loss, and reduce the profit. There would be no negative tax implications. You would receive tax relief on the value of these items of expenditure.
If you spend the funds on personal expenditure, this value will be recorded against your Directors Loan and you will have two options on how to deal with this;
- Repay the funds you take now at a later date, but no later than 9 months after your year end.
- Accept a 32.5% tax charge, on top of your corporation tax bill for the year, on the balance of the loan that remains outstanding 9 months after your year end. For example, if you owed the business £10,000 at this point, your S455 tax liability would be £3,250. This balance can be reclaimed in part or in full if you repay the loan within 4 years of the date the loan was made.
- If you owe any more than £10,000 at any point in time, that cannot be cleared by a dividend, the Directors Loan will attract a further tax due to the benefit in kind you are receiving for being in debt (an interest free loan), and your limited company will also need to pay a Class 1A National Insurance liability at 13.8% for offering you a beneficial loan.
What can I spend the Bounce Back Loan on?
There are a number of things that you can spend the Bounceback loan on which will not bring any negative tax implications, and I have compiled a list (this does not cover everything, and you should contact us for advice on anything more specific to your personal situation);
- General business running costs, and overheads - Whilst your business is unable to trade, or is trading at a reduced level, you can use this loan as a cushion to ensure you meet all of your essential supplier payments.
- Diversifying your service or product, if you need to alter your way of trading as a result of COVID, you can use the loan to cover costs associated to this.
- Training and Development - if you are currently stuck at home and unable to work, this is the perfect opportunity to update your skillset or diversify your product or service offering by gaining further qualifications.
- Getting your workplace Post-COVID19 ready - The Health and Safety Executive has advised that any employers with 5 employees or more will be required to carry out a risk assessment to ensure the correct measures have been put in place to protect your employees and visitors to your premises.
- Website Development/Redesign/Branding - It is more important now than ever, to ensure your business is positively represented online, right now whilst people are having less contact with one another, your referral rate may fall, and footfall for certain businesses right now is non-existent, so when you return to trading, the internet may be the only place people are looking for your business or service.
- Tools or Equipment - If you have equipment or tools that need upgraded, that would enhance your service offering and encourage a robust return to trade, you can use the loan to finance these costs.
- Repaying other business liabilities. You may already have outstanding business loans, which are being paid back at a much higher interest rate, there is no limit on the amount of this loan that can be used for refinancing.
- Paying yourself a higher salary. There is nothing in the guidance that states the business expenses you are paying cannot include an increased Directors Salary, you must just be aware that doing so will increase your tax and national insurance liability on a monthly basis via your Directors PAYE but may be a solution to allow you to withdraw some of the funds for personal use.
About the author
Emma Armstrong