Martin’s analysis: ‘It’s not ideal, but you can convert these loans into your own government income support scheme‘
MSE Founder Martin Lewis said, “While millions who work for themselves are covered by the government’s income support system, huge chunks are ineligible and receive no assistance. This includes those who start business after around September 2018 Freelancers with Some Self Employed Only, Individuals with a profit in excess of £ 50,000, and Individuals who work for themselves through a limited liability company.
“In this case, bounce-back loans are not only a prime solution for supporting all small businesses, but also a potential stopgap for the surge in personal income caused by the coronavirus economic disaster. This is clearly far from ideal – these are loans, so the official’s support schemes are non-refundable grants. Until and when something else is developed, this is the only show in town for many (but always check if you are eligible for universal credit).
“And although unfortunately it is currently unlikely that the support network will be expanded as these are interest-free and payment-free for the first year. If another program is introduced shortly, you can simply pay it back free of charge.”
Nothing in the rules prevents you from using Bounce Back to support your income
“Now to the technical area. There’s nothing in the bounce-back rules to stop you from using the loan to support your income (although it’s worth checking your own tax situation and corporate structure if anything is restricting it). However, as I know, a positive “You can do this” is better than “There is nothing you cannot do.” We have received written confirmation from the Treasury Department.
“It has confirmed that there are no strict rules about what these loans can be spent on while they’re under the banner of working capital or investment – things that keep the lights on like debt servicing, bills, running costs and crucial wages More than that, it has re-confirmed that you can apply for this loan even if the only reason is to support your income.
“Bounce-back loans are a conduit for help. The lack of repayments and interest in the first year makes these loans far more attractive than regular financing to a troubled company or business owner. If things improve within a year, you can Fix the problem. ” Loans before there are actually any costs – and if it takes longer and there are costs, it’s pretty cheap.
“In fact, it is so cheap compared to traditional business loans that it is worth using this loan to pay off existing funds, to give yourself a year of payment and interest vacation, followed by long-term reduced costs.
“Of course, my general rule is never to borrow more than you need. And in principle, that’s correct. For the financially self-disciplined, however, there is an argument that this is interest-free for a year and you loan yourself a loan now for the In case it is needed it is not risky. Take what you need then save it in top savings (you are protected up to £ 85,000) and hopefully you won’t use it and then get it back for free before that Year is over.
“But only do this if you are not using the money unnecessarily or excessively generously. If you do not trust yourself, don’t do it. Borrow only the bare minimum you need and try to make it as soon as you can.” possible to repay. Ultimately that is still debt, and debt is like fire – used well, it’s a useful tool, badly used, it burns. “
How to get the money out in practice to support yourself
“This is where it gets more difficult. The Treasury Department has confirmed that you can use the money to support your income, but how? And what is the effect of the taxes? These are questions to ask your tax advisor or accountant for security reasons, as the case may be which depends on your exact setting.
“I have to be honest – this is not my bag. My specialty is consumer, not corporate finance. However, I have prepared some basic information that you can get from talking to an advisor (I need to double-check.” Multiple sources – and will be updated in the future), but you can also get tailored help here.
“The big starting point is that this loan is for working capital – cash flow so you can do what you normally do, so you can keep payments going normally. The advisor told me the main rule is” don’t take. ” not the piss “- what exactly needs to be done depends on your structure:
- Sole proprietorship / business owner: You can take cash out of business simply because you are the business. And taking the money doesn’t incur any tax because you pay that based on profit, not withdrawals. Since this loan is, of course, your loan, you will need to repay it.
- Limited Liability Directors: It’s more complex. The loan money is owned by the company, not you. There are three ways that owners can get money from limited companies:
1. Dividends. They have to be paid out of profits and a loan is not a profit. However, the loan (or refinancing other loans) can provide the cash flow needed to pay a dividend if the money is not otherwise available.
2. Salary. If all you want is your salary the first thing you need to think about, but that means you cannot work except to meet your minimum legal obligations as a director.
If that’s not for you, then using the loan money to cover your salary is clearly a working capital purpose. So that’s fine. It is probably far more difficult to argue that you can raise your salary (even to cover lost dividends) since these loans must be used for the economic benefit of the company rather than the individual.
3. A loan to a director. If there is cash in the company (for example, the loan will free up other cash) it can be loaned to a director on a temporary basis. However, if this loan is not repaid within nine months, the company will typically have to pay a 32.5% corporation tax which is a huge achievement. If there is no fee, then you will need to look for taxes in kind interest on the loan.
And that’s it. Did I mention that you should discuss your situation with your own advisor …? “