The Bounce Back Loan scheme by the UK Government was a saviour for many businesses; however, a question asked by many business directors is if their Bounce Back Loan could be used to pay dividends.
How can a Bounce Back Loan be used?
A Bounce Back Loan (BBL) must be used in a way that provides economic benefit to the company. This means using the loan for things such as working capital, not personal purposes.
It is highly advisable you keep written records of how you spend your BBL, with the appropriate invoices and receipts where necessary.
Can a Bounce Back Loan be used for a salary?
Yes, Bounce Back Loans can be used to pay employee salaries, as well as company directors salaries too. Typically, company directors work in an employee capacity of the company they own, making it perfectly fine to pay their salary using the BBL.
However, the loan cannot be used for salary increases or to pay bonuses.
Can Bounce Back Loans be used to pay dividends?
No, using a Bounce Back Loan to pay dividends is illegal under the Companies Act 2006 if there are insufficient distributable profits to support the payment.
While it might be easy to think that this is acceptable to pay dividends using a BBL since you can use it to pay salaries, it does not provide the same economic benefit to the company as salaries do.
What is an improper use of a Bounce Back Loan?
Although the term “economic benefit” is fairly broad, there are certain uses of a Bounce Back Loan that would be classed as improper.
Improper use might include, but is not limited to, the following:
- Using the funds to purchase personal assets
- Transferring a lump sum into personal accounts
- Giving the money to a third party, such as friends and/or family members
- Funding a significant increase of a directors salary
Are there consequences for paying dividends using a Bounce Back Loan?
If you have already used your Bounce Back Loan to pay dividends to yourself or shareholders, you will have violated the Companies Act 2006. You could be subject to the following consequences, including:
- A tax charge may be levied: If your Bounce Back Loan has resulted in an Overdrawn Directors Loan Account due to dividends payments, HMRC may subject you to a tax charge of 32.5%. This charge will apply unless you pay back the loan within 9 months and one day.
- Being subject to an investigation: If you decide to liquidate your company after having a Bounce Back Loan, as part of the liquidation process, you will be investigated by an Insolvency Practitioner.
The investigation will look at how you spent your BBL, and if it is found you did not use it for the economic benefit of the company, you will likely face penalties. These penalties could include fines, disqualification from becoming a director, personal liability for debts and even imprisonment.
- Being reported to the national crime agency: If your lenders suspect you have misused your Bounce Back Loan, such as using it to pay dividends, then they may report you to the National Crime Agency.
What is an illegal dividend?
An illegal dividend is one that is claimed when a company does not have sufficient profits.
There are numerous ways an illegal dividend can happen:
- Insufficient funds
- Drawn without reference to the relevant accounts
- The company was insolvent when paying the dividend
- It was not properly declared
- The dividend was backdated
- Money is withdrawn without it being properly identified
You are not allowed to keep an unlawful dividend even if you have already spent it, and they will usually have to be paid back.
How do I know how much profit I have available to pay a dividend?
To calculate the available dividend to pay, you would first need to calculate the profit available. Total Revenue – Direct Expenses – Overheads = Profit.
Calculating your provision for the corporation first will help assist with available profit after tax available to pay a dividend.
For example: If a company’s revenue is £20,000 and has expenses of £15,000, then the corporation tax will be payable on £5,000 profit equalling £950. The dividend therefore, that would be available is £4,050 = Profit – Company Taxes = Dividend Payable.
*corporation tax working is based on 19% on 1st April 2022
It’s best to speak to a professional about your Bounce Back Loan if you are struggling with what to do with the funds, and especially if you are worried about the repayments.