Martin’s analysis: ‘It’s not ideal, but you can turn these loans into your own Government income support scheme‘
MSE’s founder Martin Lewis said: “While millions who work for themselves are covered by the Government’s income support scheme, huge swathes aren’t eligible, and don’t get any help. That includes those who started businesses after roughly September 2018, freelancers with only some self-employed work, those with profits over £50,000 and people who work for themselves via a limited company.
“In that case, as well as their main use to support all small businesses, bounce back loans are a potential stopgap solution to the personal income hump caused by the coronavirus economic cataclysm. Clearly this is far from ideal – these are loans, the official support systems are non-repayable grants. However, until and if something else is developed, for many this is the only show in town (though always check if you’re eligible for universal credit).
“And while sadly it doesn’t currently look likely that the support net will be broadened, as these are interest and payment-free for the first year, if another scheme were to launch shortly, you can simply repay it at no cost.”
Nothing in the rules stops you using bounce back to support your income
“Now on to the technical. There is nothing in the bounce back rules stopping you from using the loan to support your income (though it’s worth checking your own tax situation and corporate structure in case anything there limits it). However, as I know a positive “you can do this” is better than a “there’s nothing saying you can’t”, we’ve got confirmation in writing from the Treasury.
“It has confirmed there are no strict rules on what these loans may be spent on, as long as it is under the banner of working capital or investment – ie, things to keep the lights on, like debt service, bills, running costs and crucially wages. And more so, again it has confirmed you can apply for this loan even if the only reason is to support your income.
“Bounce back loans are therefore a channel for help. The lack of repayments and interest in the first year makes these loans far more attractive for a struggling business or struggling business owner than normal finance. If things improve within a year, you can clear the loan before there’s any actual cost – and if it takes longer and there is a cost, it’s pretty cheap.
“In fact, it’s so cheap compared to standard commercial lending, it is worth considering using this loan to pay off existing finance, to give yourself a year-long payment and interest holiday, followed by reduced cost in the longer term.
“Of course, my general rule is never borrow more than you need to. And in principle that is right. However, for the financially self-disciplined, there is an argument that as this is interest-free for a year, granting yourself a borrowing facility now in case it’s needed isn’t risky. Take what you may need, then store it in top savings (you’re protected up to £85,000) and hopefully you won’t use it and can then repay it at no cost before the year is up.
“But only do this if you won’t use the money unnecessarily or overly liberally. If you don’t trust yourself, don’t do it. Only borrow the very minimum you need, and aim to repay as quickly as possible. Ultimately this is still debt, and debt’s like fire – used well it’s a useful tool, used badly it burns.”
How in practice to get the money out to support yourself
“This is where it gets trickier. The Treasury has confirmed you can use the money to support your income, but how? And what’s the tax impact? These are questions that for safety’s sake, you must ask your tax adviser or accountant as it depends on your exact set-up.
“I need to be straight – this isn’t my bag. My speciality is consumer, not business finance. However, I’ve prepared some basic info you can jump off based on conversations with one adviser (I need to double-check with multiple sources – and will update in future), but again do get bespoke help.
“The big starting point is that this loan is for working capital – for cash flow to enable you to do what you normally do, so you can use it to keep up the normal payments made. The adviser told me the main rule is “don’t take the piss” – exactly what to do depends on your structure:
- Sole traders / business owners: You can take cash from the business, quite simply because you are the business. And taking the money doesn’t trigger any tax, because you pay that based on profit not withdrawals. Then again, of course, as this loan is your loan, you’re liable to repay it.
- Limited company directors: This is more complex. The money from the loan belongs to the company, not to you. There are three main ways owners get money from limited companies:
1. Dividends. They must be paid from profits and a loan isn’t a profit. But the loan (or refinancing other loans) might provide the cash flow needed to pay a dividend, if the money is not available otherwise.
2. Salary. If you just want to cover your salary, the first thing to consider is to furlough yourself, but that means you can’t work, except for fulfilling your minimum statutory obligations as a director.
If that isn’t for you, using the loan money to cover your salary is clearly a purpose of working capital, so that’s fine. It’s likely to be far trickier to argue that you can increase your salary (even to cover lost dividends) as these loans have to be used for the economic benefit of the company, not the individual.
3. A loan to a director. If there’s cash in the company (for example, the loan frees up other cash) then it can be temporarily lent to a director. Yet if that loan isn’t repaid within nine months, then the company will usually need to pay quasi-corporation tax at 32.5%, which is a big hit – and do watch for tax as a benefit in kind if you don’t charge interest for the loan.
And that’s it. Did I mention to check your situation with your own adviser…?”