Bounce Back Loan

hxe01

So I had a  contract end in Jan 2020 then Covid hit in March 2020. I struggled to get work and took the BBLS £35k. Didn't work again until Feb 2021 on a short contract which I was offered to turn perm, and took due to not feeling confident in the market any longer. I took interest only payment holidays and on my 3rd currently and switched to 10 year repayment due to begin in November 2022. It's always bugged me though that I felt I met the requirements to wind up my company as I couldn't get work due to Covid and haven't traded since Fev 2021 for 3 months..3 months in total between Jan 2020 - August 2022!

My company is still active but it's not trading or has traded for over a year. I will be paying the BBLS back out of my own pocket, the company has no assets. I used the £35k to cover living costs/expenses sending it directly to myself and asked at the time if a Director can pay dividends and there was no clear answer back then (apparently Martin has since got that answer as yes you could!) I sent £25k initially to be spread out then another £8k later and finally £3k. 

Would I meet the requirements to have this written off as currently my company is open for no reason and not being used other than to be open to repay the BBLS?

Jeremy535897

There are a number of cases being reported where company owners have taken out BBLs, used the money for personal purposes, and then put the company into liquidation. However, banks have been asking what the money has been used for, and where it is used for such purposes, they have asked for immediate repayment.

There is a difference between a company that continues to trade, but takes a BBL that it uses in part to maintain directors' remuneration and dividends, and a company that has essentially stopped trading but takes a BBL to pay the director's living expenses. The latter should not have been granted the loan in the first place, because a company that doesn't trade can hardly "bounce back".

It would be sensible to speak to a qualified insolvency practitioner about your particular situation.

tifo

hxe01 said:

So I had a  contract end in Jan 2020 then Covid hit in March 2020. I struggled to get work and took the BBLS £35k.

I used the £35k to cover living costs/expenses sending it directly to myself and asked at the time if a Director can pay dividends and there was no clear answer back then.

Did you struggle to get work because of covid? This was one of the criteria, i.e. that covid affected your business.

I understand that dividends are payed from profit, that's always been the case so when you say "there was no clear answer", that is the answer. If your company was not trading and would not have had the dividends to pay you £35,000 from profit then you could not have taken this money. I may be wrong though because if covid affected your business but prior to this you were paying yourself £35,000 or more in dividends then you have a reason for taking this money.

It seems you're on dodgy ground.

Grumpy_chap

Does the OP engage the services of an Accountant in relation to their business and / or personal tax affairs? 
If not, I recommend that professional Accountancy advice would be needed (or Insolvency Practitioner, as Jeremy suggested, but I suspect an Accountant can get to the required result quicker and cheaper).
This is potentially more complicated than it first seems, particularly if any errors need to be "rolled back".

The OP has Ltd Co., trading as normal until Jan 2020.
Trading income ceased from Feb 2020 onwards.
COVID from end March onwards meant the Ltd Co could not secure ongoing trade.  
For someone in a contracting role, short voids are normal so it is plausible that the extended void is the result of COVID and eligibility for the BBLS satisfied.
BBLS £35k means the company normal turnover £140k or more per year.
OP next secured income generating trade February 2021, likely INSIDE IR35 (so outwith the Ltd Co) and OP has since gone staff employed with that company.

The OP used the £35k BBLS to fund their personal living expenses from the business.
OP states this was paid as dividend.  £36k total (25 + 8 + 3)
Dividend can only be paid from profits.
No trading income from Feb 2020, so the profits must have been retained funds.
If so, the retained funds from the business were used to pay the dividends.
The BBLS funds will remain in the business bank account.
OP will have paid income tax on the dividends - assume personal tax return already submitted for the period.

Where are the BBLS funds now?
It sounds as though they are not in the business bank account.
Were the BBLS funds used for something other than the dividends?
Or were the dividends not actually dividends?

If the dividends were not dividends, were they paid to the OP as salary?  Associated income tax and NI liabilities.
Alternatively, were the funds paid to the OP as Director's Loan?  In which case, the OP will need to repay the loan to the business and the business repay the BBLS before the business can be wound up.

If the Ltd Co. has the liability (BBLS) plus asset (Director's Loan), these will offset each other and the Ltd Co. is not insolvent.

Did the OP think they were drawing dividends but now realise they could only have drawn salary or Director's Loan and therefore a "roll back" is required to correct errors.  This will impact both the Ltd Co. and the OP's personal returns.

hxe01 said:

So I had a  contract end in Jan 2020 then Covid hit in March 2020. I struggled to get work and took the BBLS £35k. Didn't work again until Feb 2021 on a short contract which I was offered to turn perm, and took due to not feeling confident in the market any longer. I took interest only payment holidays and on my 3rd currently and switched to 10 year repayment due to begin in November 2022. It's always bugged me though that I felt I met the requirements to wind up my company as I couldn't get work due to Covid and haven't traded since Fev 2021 for 3 months..3 months in total between Jan 2020 - August 2022!

My company is still active but it's not trading or has traded for over a year. I will be paying the BBLS back out of my own pocket, the company has no assets. I used the £35k to cover living costs/expenses sending it directly to myself and asked at the time if a Director can pay dividends and there was no clear answer back then (apparently Martin has since got that answer as yes you could!) I sent £25k initially to be spread out then another £8k later and finally £3k. 

Would I meet the requirements to have this written off as currently my company is open for no reason and not being used other than to be open to repay the BBLS?

macman

Since the company was, in order to obtain a £35k BBL, turning over at least £140k, how profitable was it, in order to be able to pay a dividend of £35k?

Grumpy_chap

macman said:

Since the company was, in order to obtain a £35k BBL, turning over at least £140k, how profitable was it, in order to be able to pay a dividend of £35k?

If the Ltd Co. is the OP as a single-person consultant / contractor in a white collar roles then that could be a low cost business and the Owner / Director may have drawn low salary so the resulting profit can be quite high.

There is one thing from the OP's post that I do not recall from various media coverage at the time:

hxe01 said:

asked at the time if a Director can pay dividends and there was no clear answer back then (apparently Martin has since got that answer as yes you could!) 

Now, this is quite an important factor.
I do recall media coverage about whether BBLS could be used to pay sole-Director / Owner salary at the rate that was established pre-COVID.  This was confirmed by various media as permissible.
I do not recall the same media coverage in relation to dividends.  Obviously, just because I don't recall it is not an absolute that the media conversation was not there but it could be worth the OP looking back to confirm this aspect of the BBLS rules.

Jeremy535897

Grumpy_chap said:

macman said:

Since the company was, in order to obtain a £35k BBL, turning over at least £140k, how profitable was it, in order to be able to pay a dividend of £35k?

If the Ltd Co. is the OP as a single-person consultant / contractor in a white collar roles then that could be a low cost business and the Owner / Director may have drawn low salary so the resulting profit can be quite high.

There is one thing from the OP's post that I do not recall from various media coverage at the time:

hxe01 said:

asked at the time if a Director can pay dividends and there was no clear answer back then (apparently Martin has since got that answer as yes you could!) 

Now, this is quite an important factor.
I do recall media coverage about whether BBLS could be used to pay sole-Director / Owner salary at the rate that was established pre-COVID.  This was confirmed by various media as permissible.
I do not recall the same media coverage in relation to dividends.  Obviously, just because I don't recall it is not an absolute that the media conversation was not there but it could be worth the OP looking back to confirm this aspect of the BBLS rules.

I think the consensus was that you could continue to pay dividends and remuneration at similar or lower levels than before COVID, but not increase it.

tifo

Jeremy535897 said:

I think the consensus was that you could continue to pay dividends and remuneration at similar or lower levels than before COVID, but not increase it.

Yes, this was the general advice and hence I said "if covid affected your business but prior to this you were paying yourself £35,000 or more in dividends then you have a reason for taking this money".

sheramber

https://www.greenfieldrecovery.co.uk/help/news-blogs/bounce-back-loans-and-the-personal-liability-of-company-directors/

Loans can be used to pay (but not increase) for Director salaries and dividends – but the business must be able to prove there is adequate profit to pay such dividends.

woolythoughts

The adequate profit could come from prior year retained profits not the current one where the cash flow issue arose.

Was exactly the situation I was in - and I wound up the company successfully writing off the loan

BBL  taken for 30K
Used to pay dividend/salary as same rate as before

Took permie job so no longer contracting
loan written off

Grumpy_chap

woolythoughts said:

The adequate profit could come from prior year retained profits not the current one where the cash flow issue arose.

Was exactly the situation I was in - and I wound up the company successfully writing off the loan

BBL  taken for 30K
Used to pay dividend/salary as same rate as before

Took permie job so no longer contracting
loan written off

I am struggling to follow this.
If there were prior year retained profits, then that means money in the business bank account which can be used to pay the dividends.
No need for the BBLS to cover the dividend payment.

I am also surprised that this is not covered by rules around Director actions. 
Making the decision to pay a dividend when the company is not able to pay that dividend without jeopardising the viability of the business is not the Director acting in the best interest of the business.

A small number of people may think they have done well by these loan and "free money" but the outcome will be an aggressive tightening of all business rules in the future.
Also, likely some tightening that supresses new small businesses because there will be a constraint on how Directors can be remunerated.  That was already a problem given the Directors took a decision to take remuneration in a low-tax method but then when the pandemic hit, the (unhelpful) consensus amongst media was that these Directors should be helped from the public purse like employees that had not been able to avoid tax along the way.