There has been some media coverage recently about “fraudsters” applying for the Government’s Bounce Back Loans, and using the funds to buy supercars or property. Supercar dealers have said that their business is booming since the Bounce Back Loans have been paid out. Of course, the rates of interest are making this cheaper than the usual finance agreements, but while we would all love the means to buy a Ferrari, are these people doing anything wrong?
We have also seen recent reports of people claiming the loans, with the intention of ‘phoenixing’ their companies, or using dormant companies to apply for the Loans, meaning that the entity that did the borrowing will no longer exist to pay it back, leaving the general tax payer to foot the bill, this doesn’t seem right, somehow.
What is the Bounce Back Loan?
The Bounce Back Loan Scheme (BBLS) was put in place by the Government to enable small businesses to access finance more quickly during the coronavirus outbreak, helping small and medium-sized businesses to borrow between £2,000 and 25% of their turnover, up to a sum of £50,000.
The Government guarantees the loan and there is no interest to pay for the first 12 months, with a fixed rate of 2.5% payable following this.
Can Directors spend the money on personal luxuries?
HSBC have stated that the BBLS: “can be used for any economic benefit to your business, enabling it to continue as a going concern, which may involve the refinancing of an existing facility used for an Eligible Purpose and to support trading or commercial activity in the United Kingdom.”
In short, therefore, BBLs are to assist your company, and are certainly not intended to be used for personal finances. Of course, if this money was to be spent on personal items, as with any personal expenditure through the Company accounts, there would be a hefty Director’s loan to repay! Your accountant will be able to advise you on the implications of this.
HM Treasury have said that the banks are taking precautions on the applications they receive, and keeping an eye on spending, and any fraudulent claimants will be prosecuted. In essence therefore, as long as the claim is made legitimately through a current business, what the Directors then do with the money they receive, is up to them, as long as it falls under the banner of working capital or investment.
The BBL can be used to pay staff wages, and this therefore includes Director salaries. As always, unless the Company is in profit, dividends cannot be paid, however there are no obvious restrictions on what Directors spend the BBL on once it has been received.
The main point being that the BBL is to be used for working capital and investment purposes. Whether the Government will look into what the funds were spent on is anyone’s guess right now, but to be safe, we would certainly suggest only using the funds obtained for legitimate business purposes, as it is intended, to avoid what could be a sticky situation later on.
As many directors pay a minimum salary to themselves, suddenly increasing their salary amount (and/or using the funds to pay dividends), would ring alarm bells as to whether the funds are being used for the working capital or investment purpose and could of course therefore be open to potential question and challenge.
Applications will be investigated for their legitimacy, and audits are likely to be carried out over the next few years in relation to government backed funding schemes (from Furlough to CBILs) HMRC have made that much clear. It is imperative therefore that the applications made are honest and in no way ambiguous.
What about winding up a Company so it doesn’t have to be repaid?
Or perhaps the bigger question on everyone’s mind is, what happens if I can’t pay it back?
In the event of any default, the lender will look to recover the finances through assets of the company. However of course this has not been tested yet in practice and the only guidance to rely on is that personal guarantees cannot be taken.
Therefore, as personal guarantees are not given for BBLs, on default, the banks will look to get their money back from the company, looking to seize goods or other company assets before looking to the Government for recovery. Of course, any defaults in paying will show up on credit reports.
If you were to wind up your company, the usual protection would be given to creditors – the assets would be sold to pay them.
Phoenixing a company (the directors buying the assets of an insolvent Company to start a new one, that does pretty much the same thing) is perfectly legal, as long as it is carried out properly. However, slip ups do happen, and there are big consequences if assets are sold at an undervalue, something to definitely bear in mind, and something liquidators and insolvency practitioners are keen to sniff out.
So what does this mean?
The loans should only be taken for their intended purposes, to assist business and not to see this as an opportunity to dash to the nearest Maserati dealership. Sticking to the rules now could avoid major headaches later down the line.
If you are unsure, speak to your accountant or get in touch with us, and we can certainly assist with pointing you in the right direction. As always, acting sooner than before it is too late is our best advice.
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