Does taking money out of a bounce back loan incur tax?

AndyLGR

A quick question on the bounce back loan. I’ll be applying for this to help with cash flow over the next couple of months. Im guessing it will have to show it on your company accounts as a loan, but once you draw any money out of your business account once the bounce back loan goes in does that automatically then get classed  as part of the wages or dividends or even a directors loan?  Therefore you’re paying tax on the bounce back loan in addition to the 2.5% interest.

Jeremy535897

The bounce back loan is like any other business loan. If a company spends its resources on a director's salary, whether the funds derive from a bounce back loan or otherwise, that salary is taxable in the director's hands. There is nothing special about a bounce back loan in this regard.

AndyLGR

Jeremy535897 said:

The bounce back loan is like any other business loan. If a company spends its resources on a director's salary, whether the funds derive from a bounce back loan or otherwise, that salary is taxable in the director's hands. There is nothing special about a bounce back loan in this regard.

Thanks, so in effect it’s just classed as an income as if it were money from a client that’s gone to pay wages or stock or bills etc. 

Grumpy_chap

 AndyLGR said:

Thanks, so in effect it’s just classed as an income as if it were money from a client that’s gone to pay wages or stock or bills etc. 

Except the loan has to be repaid.  Money from a Client usually does not.

Jeremy535897

AndyLGR said:

Jeremy535897 said:

The bounce back loan is like any other business loan. If a company spends its resources on a director's salary, whether the funds derive from a bounce back loan or otherwise, that salary is taxable in the director's hands. There is nothing special about a bounce back loan in this regard.

Thanks, so in effect it’s just classed as an income as if it were money from a client that’s gone to pay wages or stock or bills etc. 

No it is not. It is a loan. The receipt of a loan is not income.

AndyLGR

Jeremy535897 said:

AndyLGR said:

Jeremy535897 said:

The bounce back loan is like any other business loan. If a company spends its resources on a director's salary, whether the funds derive from a bounce back loan or otherwise, that salary is taxable in the director's hands. There is nothing special about a bounce back loan in this regard.

Thanks, so in effect it’s just classed as an income as if it were money from a client that’s gone to pay wages or stock or bills etc. 

No it is not. It is a loan. The receipt of a loan is not income.

But what you do with it would incur tax if you used it to pay wages for example?

mobilejo

AndyLGR said:

Jeremy535897 said:

AndyLGR said:

Jeremy535897 said:

The bounce back loan is like any other business loan. If a company spends its resources on a director's salary, whether the funds derive from a bounce back loan or otherwise, that salary is taxable in the director's hands. There is nothing special about a bounce back loan in this regard.

Thanks, so in effect it’s just classed as an income as if it were money from a client that’s gone to pay wages or stock or bills etc. 

No it is not. It is a loan. The receipt of a loan is not income.

But what you do with it would incur tax if you used it to pay wages for example?

Yes.

Regardless of where the money came from, it is the company's money and so any withdrawal from the company to the director will be taxed in the normal way. There is no 'special' treatment just because it is a BBL.

Jeremy535897

I don't think you understand some of the basics of accounting, which is what is troubling you. You are confusing transactions involving assets with income and expenditure.

If you send a customer a bill, that creates income. If you use the cash basis, it is income when the customer pays you. Otherwise it is income when you raise the invoice. We'll keep it simple and assume you use the cash basis.

Your customer pays your invoice. There are two sides to this (double entry bookkeeping). One side is the income, the other is the cash in the bank you got paid.

When you pay the rent, there are two sides to that: the rent is an expense, and your bank balance goes down. If the expense paid is someone's wage, the wage is an expense, and the bank balance goes down. As an entirely separate matter, the person receiving the wage pays tax on that, via PAYE deducted by the employer.

When you borrow money from the bank, the two sides to that are that your bank balance goes up, and your loan balance on the other side of the balance sheet goes up. When you pay off some of the loan from your bank account, your bank balance goes down and the loan balance goes down. There is no income and no expense, just movement between one asset (bank balance) and one liability (loan balance).

jfinnie

I'm not an accountant; but the following is my rough understanding.
If you're a business that has been in the habit of paying low salary and taking dividends, I don't think that is a way in which you can draw down the loan money.  As @Jeremy535897 says, the loan has two halves - your bank balance and the loan account at the bank.  You get money in your bank account from the BBLS and it becomes a credit on your bank balance, and a debit on your loan account.  There is no extra income and no extra profit, and dividends are by definition distribution of profits.
I don't think (unless you've already been retaining a significant profit surplus in the business as a buffer, and you decide to replace that buffer with the loan) that you can really draw down as dividends without it being judged an illegal dividend, as there isn't an extra profit to take out of the business.  
It seems if you need the money personally permanently it probably has to come out as salary (Tax + NI implications), and those salary payments will prevent you making legitimate dividends later if they've resulted in the business not having profit retained.  If you only need it for a short while then it could be taken out as a director's loan until your business gets back to the point of being able to pay dividends, but there are tax implications if you can't return the money to the business in the required timeframes.

Jeremy535897

You get money in your bank account from the BBLS and it becomes a credit on your bank balance, and a debit on your loan account. 

Other way round, for the purists out there. Debit bank, credit loan with the initial amount borrowed.

jfinnie

Jeremy535897 said:

You get money in your bank account from the BBLS and it becomes a credit on your bank balance, and a debit on your loan account. 

Other way round, for the purists out there. Debit bank, credit loan with the initial amount borrowed.

Thanks, I was looking at it from the mechanical way my Freeagent setup works, where after following their instructions for a loan (https://support.freeagent.com/hc/en-gb/articles/115001217230-Deal-with-a-loan?source=search).  I start with a new loan account with a zero balance, funds are credited from the lending bank to my business current account; those funds arriving are justified as being a transfer from the loan account to the current account, and the loan account then has a debit balance at that point of the amount of the loan. 
Appreciate that form a purist point of view I guess by calling it a "loan" it really has positive balance when it is a debt (it's a loan of a positive number, not a loan of a negative number!).  I think the Freeagent view of the world must perhaps stem from them treating all accounts (bank accounts and loan accounts) as the same and so they're only differentiated in the SW by the sign on the balance...