Accounting for bounce back loan

NorthEastforever

Hi, really hoping someone might be able to help.  A friend got a covid bounce back loan for business. He is aware that he can claim only the interest element of the repayments but obviously, the money he borrowed went into the business.  Since this is a bit like him introducing cash in to the business to help it at a difficult time, is there any tax recognition of this in terms of his tax bill ?  If so, where would he account for it?  He only does three line accounts due to lower turnover.
Thank you for any help.

Jeremy535897

The place the loan belongs is the balance sheet, and if he only completes three line accounts, he won't do a balance sheet. The interest on the BBL forms part of the expenses claimed in the second line.

It is not like cash introduced, which is equity, unlike a BBL, which is debt, but the distinction is irrelevant if you don't prepare a balance sheet.

NorthEastforever

Thank you @Jeremy535897 Sorry, of course you are right and it is debt but if he takes on debt for his business it seems really rough that he can't claim the repayments (other than interest) but I must confess I find accounts pretty confusing

Jeremy535897

He didn't pay tax on the amount he was lent, so why would he get tax relief on the amount he pays back?

Grumpy_chap

NorthEastforever said:

if he takes on debt for his business it seems really rough that he can't claim the repayments (other than interest)

That would ultimately mean that the amount of the debt is double-counted as far as tax off-set is incurred.

The business profits are income less expenses.
So, does a job for a Client and charges £1,000.
It costs £750 to do that, including the cost of labour, materials, travel, etc.
That means £250 remains as profit which is then subject to tax.

Now, suppose it was a brand new business, so the business borrows £1,000 to cover this first job.  Increases the bank balance by £1,000.
The job is still charged at £1,000.
The costs are £750 plus, say £10 interest, making a total cost of £760.
That means £240 remains as profit.
After 5 such jobs, there are profits £240 x 5 = £1,200 so the loan is repaid.
Decreases the bank balance by £1,000.

You can see that the effect of taking and repaying the loan is simply to increase or decrease the bank balance.  It does not change the profit at either end.  The interest in the middle is a cost of trading so does change the profit.

Hope that helps.

NorthEastforever

Thank you for a really helpful example @Grumpy_chap   I guess what I was thinking was that he put in £6k from a loan (which was used by the business) but then he can't claim the repayments (other than interest) whereas if he introduced £6k of his own money at some point, he can take it back out in the future. But I see it now.  It is going back out - but to the bank that loaned it rather than back to him. (I think !) 

Grumpy_chap

That seems correct - the bank introduced (as a loan) the £6k and the bank take it back out again.

In the mean-time, the bank charged interest for having the use of that money.

In and out of the loan is not in the profit and loss account but the interest is an expense.  Exactly as Jeremy said, the loan only appears in the balance sheet but there is no balance sheet prepared for a business using simple accounting.