The UK government’s Coronavirus Bounce Back Loan Scheme [BBLS] has helped support many businesses during the pandemic. However, Simon Howley, managing partner at tax and law advisors Bell Howley Perrotton, warns that directors who may have taken the decision to withdraw the money for personal purposes or to pay dividends could have acted illegally in the eyes of the law.
The BBLS was open until March 31 this year and enabled firms to apply for a minimum of £2,000, maximum of £50,000 or 25 per cent of business turnover [whichever is lower] loan, which is repayable over either six or ten years. The government pays the interest to the lender for the first 12 months.
Writing on LinkedIn, Howley says: “Some directors would have withdrawn this loan money to survive personally and pay personal bills, but this was not the purpose of the loan.”
Indeed, the conditions of the BBLS were that the loan is not to be used for ‘personal purposes’, including director’s loans and/or withdrawals.
Howley continues: “Should the lender bank become aware that this has occurred and believe that the loan has been used fraudulently, then it has a legal duty to report its suspicions to the National Crime Agency [NCA] under the anti-money laundering rules. Other people may also be obliged to report the activity including the company accountant and any business regulated as a ‘High Value Dealer’.”
Howley’s advice has been vindicated by the fact that the NCA has already made several arrests for fraudulent claims using the BBLS.
While withdrawals of loan money for personal purposes are considered very much illegal, it does beg the question: what if the money was paid out in the form of a salary or dividend?
“Customarily, withdrawals made by a company director take the form of a salary, bonus, or dividend”, Howley explains.
“While payment of a salary is allowed under the terms of the BBLS - because it is deemed ‘working capital’ under tax law - many directors take out only the ‘optimum amount’ for National Insurance Contributions purposes [£9,500 for 2021/22 or £12,570 where the Employment Allowance is available] and will more than likely have already withdrawn that amount before taking out the loan.”
In the circumstances that Howley outlines, any additional payment would be seen as a dividend, and for the dividend to be legal it must meet certain conditions.
Howley outlines: “A company can only make a distribution such as a dividend out of accumulated, realised profits. It is of course possible to pay a dividend in a loss-making period, providing there were sufficient ‘distributable’ or retained profits or reserves over previous years.
“But, if there were no such profits, then the dividend would be deemed ‘illegal’ under the Companies Act 2006.”
Personal use of the loan could also result in a hefty tax bill for the company concerned, if the money is not repaid into the company’s bank account within nine months and one day after the company’s year-end.
“If the loan monies have been withdrawn making a directors' loan account overdrawn, and if a dividend cannot be made because the amount of reserves is not available, then the loan must be repaid within the nine months and one day otherwise the company will be charged a tax bill of 32.5 per cent”, Howley writes.
“Repaying the loan at a later date, either in cash or cleared by funds being credited to the director’s loan account, such as the credit of a salary or dividend payment or written off, will result in the tax being repaid.”
Howley also advises that the individual borrowing the money under such circumstances could also be liable under the beneficial loan provisions where the balance outstanding on the director’s account is at least £10,000 at some point in the tax year, unless the loan is otherwise exempt. However, this charge is avoidable if payment of interest on the loan is made at the two per cent official rate.
If a business that has taken out the loan is unable to stabilise its finances and enters liquidation, issues relating to the incorrect use of the loan and non-repayment could then arise.
Highlighting what would happen in such circumstances, Howley writes: “Insolvency practitioners would be obliged to investigate the use of the loan, especially if it was taken out and then dividends withdrawn shortly afterwards.
“In their eyes such a use of the money means that there were no unreleased profits in the company from which dividends could be drawn, and therefore the withdrawal would still have been illegal.”