No, using a Bounce Back Loan to pay dividends is generally not an appropriate or legal use of the loan funds.
Bounce Back Loans were specifically designed to provide financial assistance to small and medium-sized businesses (SMEs) during the COVID-19 pandemic, with the primary aim of helping them cover essential operational costs and navigate economic uncertainties.
These loans were not intended for personal use or for distributing profits to shareholders.
Have you paid dividends using your Bounce Back Loan?
Working capital is used to pay salaries, but dividends can only be distributed from the company if there are enough distributable profits. Retained gains from prior tax years can be one of them.
You might think that a Bounce Back Loan could be used to pay dividends because they normally are included in a director’s overall compensation package. However, it’s crucial to be aware that, if there aren’t enough distributable profits to sustain the payment, utilising your company’s Bounce Back Loan to pay dividends is against the law according to the Companies Act of 2006.
What are the consequences of paying dividends with a Bounce Back Loan?
You have breached the Companies Act of 2006 if you have already used a bounce back loan to pay dividends to yourself or shareholders. As a result, you can experience the following effects:
- A tax charge of 32.5% may be assessed by HMRC if your bounce back loan caused an overdrawn director’s loan account (ODLA) as a result of dividend payments. Unless you pay back the loan within nine months and one day, this tax charge is applicable.
- Being the target of an investigation You have an obligation to act in the organization’s best interests as a director. This obligation includes your choice to take out loans and how you use them. Your conduct as a director will be investigated as part of the liquidation procedure if you decide to dissolve your business after obtaining a bounce back loan. We’ll also examine how you used your bounce-back loan in our examination. You can be subject to fines if you did not use it for your business’s financial gain. You could lose your ability to serve as a director, pay fines, be held personally responsible for any debts incurred by the firm, or even go to jail.
- Being reported to the National Crime Agency – Your lender is required to report you to the NCA if they believe you have mishandled your bounce back loan, such as by distributing shareholder dividends. If you are found guilty, this will have serious repercussions for both you and your business.
Salary v Dividend
A director typically receives dividends or salary/bonus payments. The BBLS will permit wage payments because they are considered “working capital” for tax purposes. Many directors, however, only withdraw the “optimum amount” for NIC reasons, which is £9,500 for 2021/22 or £12,570 where the Employment Allowance is available, and they will likely have done so before taking out the loan. Any additional payment will therefore be made in the form of a dividend.
However, a business can only distribute money (such a dividend) from profits that are available for that use, or from its accumulated, realised profits. If there were sufficient “distributable” or “retained profits” or reserves from prior years, it is feasible to pay a dividend during a loss-making period; however, if there were no such profits, the dividend would be considered “illegal” under the Companies Act of 2006.
If the money is not transferred back into the company’s bank account within nine months and one day following the company’s year-end, personal usage of the loan could result in a hefty tax bill for the business. If the loan funds have been taken, causing a directors’ loan account to be overdrawn, and a dividend cannot be paid (due to insufficient reserves), the loan must be repaid within nine months and one day, failing which the firm would be subject to a 32.5% tax penalty.
The tax will be reimbursed if the loan is paid off later (in cash, cleared by money credited to the director’s loan account, such as the credit of a salary or dividend payment, or written off).
Beneficial loans
If the director’s account balance reaches at least £10,000 at some point during the tax year, the borrower may also be held accountable under the advantageous loan provisions (unless the loan is otherwise exempt). However, if the loan’s interest is paid at the official rate of 2%, this fee can be avoided.
Liquidation
When the business enters into liquidation, issues with the improper use of the loan and the loan’s non-repayment start to occur. The utilisation of the loan must be looked into by insolvency professionals, especially if dividends were extracted soon after it was taken out. They believe that such a usage of the funds proves that the corporation had no unrestricted earnings from which dividends could be paid, and that the withdrawal would thus have been “illegal.”
Frequently asked questions
No, using a Bounce Back Loan (BBL) to pay dividends is illegal under the Companies Act 2006 if there are insufficient distributable profits to support the payment. If you used the BBL to pay yourself dividends, you may have to pay a HMRC tax charge or face a liquidation investigation into director conduct.
Yes, a bounce back loan can be used to pay a director, the loans must be used in a way that demonstrates economic benefit for the business. Loans can be used to pay (but not increase) for Director salaries – but the business must be able to prove there is adequate profit to pay such dividends. Can you pay dividends with a bounce back loan?
Can a bounce back loan be used to pay a director?
Need to speak to someone?
You are not alone if your business is dealing with unsustainable debts, tight cash flow, or an uncertain future. Every day, we meet with corporate directors just like you, and we’re here to provide you with the assistance and counsel you require. If you are worried that you have used your bounce back loan to pay dividends call us today, or simply place an online enquiry.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.