Corporation Tax Liability and Bounce Back Loans

Do you need to pay tax on Bounce Back Loans? Corporation tax liability and Bounce Back Loans are two significant aspects of business finance that have garnered considerable attention and importance in recent years. Corporation tax liability refers to the legal obligation of a company to pay taxes on its profits, ensuring compliance with the tax laws of the jurisdiction in which it operates.

On the other hand, Bounce Back Loans were introduced as a response to the economic challenges posed by the COVID-19 pandemic, providing financial support to small and medium-sized enterprises (SMEs) in the form of government-backed loans.

These loans aimed to alleviate cash flow issues and sustain businesses during these unprecedented times. Understanding the implications and intricacies of corporation tax liability and the availability of Bounce Back Loans is vital for entrepreneurs and business owners seeking to navigate the complex landscape of corporate finance

Do you need to pay tax on Bounce Back Loans?

Bounce Back Loans (BBLs) were not taxed when they were paid back during the Covid-19 outbreak, but depending on what they did with the money, some limited company directors may now have to pay a significant corporate tax bill.

When the BBL has been used to subsidise personal expenses, a potential tax burden becomes significant. At this point, it should be noted that directors were permitted to use their Bounce Back Loan to pay salaries, including their own and those of the other directors, within reasonable bounds. However, when it comes to taking money out of a limited company for one’s own use, using the PAYE route is frequently viewed as a costly strategy and is thus avoided by directors as much as possible.

This leaves the choice of receiving the funds as dividends or alternatively, borrowing money from the business. Dividends are more tax-efficient than salaries, but before they can be declared, the company must be financially stable enough to do so. In order for a dividend payment to be legitimate, the firm must have enough reserves; should a dividend payment later be deemed illegal, directors risk having this payment reclassified as remuneration and being subject to the associated tax consequences.

Therefore, for some corporate directors, borrowing money from the BBL at that particular time was the best course of action.

You may borrow money from the firm as a director so long as the company’s memorandum and articles of organisation allows you to do so. You must keep in mind, though, that a loan is just that—a debt. Eventually, this money must be returned to the corporation, and if it is not done promptly, the tax repercussions could be quite expensive.

32.5% corporation tax on loans

You must be ready for a 32.5% ‘S455’ Corporation Tax bill to appear that your company will be obligated to pay if the money borrowed from the firm has not been repaid within 9 months and one day as of the end of the company’s Corporation Tax period. Although this expense will be fully reimbursed once the loan has been repaid in full, it may be a significant barrier for businesses that are still attempting to recover from the pandemic’s damage. To put it into perspective, a loan for £50,000 with a 32.5% tax obligation would cost £16,250.

Make contact today

If you borrowed Bounce Back Loan funds from your limited company and now find yourself with a sizable corporation tax obligation you cannot afford to pay, you should make it a priority to get urgent insolvency assistance. Our team of certified insolvency practitioners at Business Insolvency Helpline will be able to give you advice regarding your present situation and outline the choices available to you and your business.

Insolvency & Restructuring Expert at Business Insolvency Helpline | + posts

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.