Is a Bounce Back Loan a Business Expense?

A Bounce Back Loan is essentially a loan that accumulates interest based on the original loan amount.

These loans were introduced during the pandemic to relieve businesses of financial difficulties and help them operate throughout Covid times.

What are business expenses classed as?

Business expenses are costs experienced by a business in order to generate revenue. Expenses include things such as salaries given to employees, advertising costs, insurance, water and electricity and any other activities or assets that can be classified as necessary for running the business.

All expenses incurred by a business during a particular accounting period are treated as a cost and recorded in an income statement known as profit and loss.

How do I record Bounce Back Loan expenses?

Bounce Back Loans (BBL) should be recorded as a loan long-term or short-term liability, depending on the length of the loan.

The monthly interest charged on the loan should be recorded as an overhead expense to the nominal Bank Loan Interest in the profit and loss statement. Recording the interest separately can help with identifying the exact figures if there are multiple loan accounts.

Essentially, the loan will sit on the balance sheet and interest will become an expense in the profit and loss, which is eligible for tax relief.

Is a business loan repayment considered an expense?

Business loan repayments are made up of the repayment capital borrowed and interest repayments, which are built across the duration of the loan.

While the repayments of the loan aren’t tax-deductible, it may be possible to deduct the interest generated over time from your tax expense bill – this is because interest is normally considered a business expense.

If your loan is and will continue to be used entirely for business purposes, you should be able to claim interest repayments as a tax deduction.

Is a Bounce Back Loan a business expense?

If the BBL is solely for the purpose of the business, then the interest on the loan is a business expense.

The repayments of the loan will reduce the liability of the loan and the interest is then deducted from the repayment figure and classed as a business expense.

The loan will remain on the balance sheet as a liability until this is fully settled. It’s recommended that you create two separate nominal ledgers for your BBL: one to reduce the loan and the other to record the loan interest.

Is a Bounce Back Loan classed as income?

Business loans, such as BBLs, are not usually considered as income since this is money you have borrowed, not earned yourself through your general business practices.

The exception here is when your lender writes off your loan in part or entirely. In this case, the debt would be treated as income for tax purposes.

Can I use a Bounce Back Loan for personal expenses?

No, BBLs were made on the condition that they would not be used for personal expenses, such as houses, cars, holidays or to clear director’s loan accounts.

They can however be used to purchase company assets that will provide an economic benefit to the company such as new, modern vehicles for employees to use or machinery which will then become a company’s fixed asset.

How is Bounce Back Loan tax treated?

Like most loans, the tax is treated through Corporation Tax. As of April 2023, the Corporation Tax Rate will be at 25%.

If the BBL is used to pay into the Director’s Loan Account (DLA) and the loan is not repaid back within 9 months of the company’s financial year end, then this will be subject to a 32.5% corporate tax charge (known as section 455 tax).

Taking a loan and repaying it in the timeframe will incur no charge.

Are Bounce Back Loan repayments tax deductible?

The repayment element of the loan is not tax-deductible, only the interest incurred is considered a business expense. Most loan statements are received annually, and keeping a good record of the loan’s liabilities, separating the interest element, is recommended.

This can be implemented by creating separate ledgers in your accounts and accruing a monthly accrual for the interest which will reflect on your profit loss.

A standard BBL has a 2.5% fixed interest rate over a six-year term. The workings for the accrual will be easier if calculated based on the balance in the loan account found on your balance sheet.

Do I include a Bounce Back Loan in my tax return?

You will only need to include the BBL in your tax return if this is used to pay a personal loan or expenses; then, a corporation tax charge will arise. A BBL should not be recorded as income on your tax return, as this is a loan, not income generated by goods or services.

Only the interest charges incurred over the lifespan of your BBL should be included in your return. Be mindful that this is not the repayment figure to include on your return.

The interest rate and charges will be calculated in your annual BBL statement and the interest rate calculated is the figure to include on your tax return.

Bounce Back Loan expense support

Even with help understanding Bounce Back Loans, expenses and tax implications, business owners can still face a whole range of financial issues.

At The Insolvency Experts, our team is available to help support businesses with making the correct decisions based on their current financial situation and how a Bounce Back Loan is affecting them. Get in touch with us for confidential advice and support on BBLs.