Wilkins Southworth

Bounce back loans, misuse of company funds and repercussions

The subject of Director’s Loan Accounts (DLAs) has recently been in the news with concerns regarding the potential misuse of Bounce Back Loans. In theory, DLAs are relatively straightforward, but they can become quite complicated when you dig a little deeper.

As Covid-19 began to have a considerable impact on businesses, it was evident that the UK government would need to act. One of several financial options introduced was the Bounce Back Loan Scheme (BBLS) which helped many businesses stay afloat. Fast forward to early 2022, the lifting of restrictions and companies gradually returning to a degree of normality. While the UK government was widely applauded when it made billions of pounds available to troubled businesses, there are now concerns about how the funds were used.

Details of the BBLS

Introduced on 4 May 2020, the BBLS allowed businesses to borrow between £2000 and up to 25% of their turnover. The maximum Bounce Back Loan (BBL) was £50,000, with many small to medium-sized businesses taking advantage of the financial support. The BBL terms were as follows:-

  • No interest paid for the first 12 months
  • No fees paid for the first 12 months
  • Fixed interest rate of 2.5% a year after 12 months
  • Loan duration six years

Those companies still struggling after 12 months had the option to:-

  • Extend the BBL duration to 10 years
  • Move to interest-only payments for a period of six months (this option can be used three times)
  • Pause repayments for a period of six months (this option can be used only once)

While the loans were administered through high street banks, the government guaranteed 100% of all BBLs.

A company is a separate legal entity

Unfortunately, some company directors and shareholders do not fully understand that a company is a separate legal entity from those who control/own the business. Company funds are not directors’ funds, and they must be distributed in accordance with company legislation.

“A limited company is incorporated to form an entity with a separate legal personality, able to undertake contracts and do business in its own name.”

There may be occasions when directors must give guarantees over loans to a company. Consequently, if the company cannot make repayments, the debt must be honoured by the directors. This is no different to an individual guaranteeing a loan for another individual, both legal entities in their own right.

Misuse of company funds

Lord Agnew, the minister in charge of Whitehall efficiency, recently resigned from the UK government over its handling of fraudulent BBLS claims. This is becoming a serious problem for the government. In January 2022, it was confirmed that the Treasury expects to write off £4.3 billion of the £5.8 billion of public money fraudulently claimed by businesses. This is money identified as having been obtained fraudulently, but the government has no real hope of retrieving it. Furthermore, it appears that some BBLS applications came from companies that weren’t even trading at the time!

This brings us to the misuse of company funds, and the potential consequences directors face under Companies Act legislation.

Example of misuse of company funds

Many accountants and clients up and down the country will be having similar conversations to this:-

Client: I just had a house extension and a new kitchen.
Accountant: How much did that cost?
Client: £50,000
Accountant: How did you pay for that?
Client: Bounce Back Loan
Accountant: But wasn’t that a loan to your limited company?
Client: Sigh. It’s my company, so it’s my money.

So what are the repercussions of this type of scenario?

Legitimate ways to withdraw funds from your company

There are four legitimate ways in which you can withdraw funds from a company, to your personal account:-

  • Salary
  • Dividend payments
  • Reimbursement of expenses
  • Directors loan

It is essential to the aware of the logistics when withdrawing funds from your company. You don’t want any unwelcome surprises!


Most company directors will pay themselves a relatively low salary, enough to qualify for state benefits, often without income tax or national insurance liabilities. This is a perfectly legal and tax-efficient way of withdrawing money from a company.

Dividend payments

Many directors pay themselves a salary with a significant element of their income paid via dividends, paid from distributable reserves. These are funds accumulated over the years from post-tax profits – if there are no distributable reserves, no dividends can be paid.

Reimbursement of expenses

If a director incurs an expense directly related to the business, this can be reclaimed from the company with supporting documentation. This would traditionally take in the likes of client entertainment, use of home, staff entertainment, telephone calls and business mileage. If HMRC was to question any of your expenses, it is crucial you have the supporting documentation to hand.

Director’s loans

A director’s loan account reflects the net balance of:-

  • Funds due to a director from the company
  • Funds due to the company from a director

It is perfectly legitimate for a company to lend money to a director, or vice versa, although there are strict regulations about interest charges and repayment.

Potential repercussions of failing to repay company loans

Unfortunately, as we touched on above, some company directors have used BBLS money to shore up their personal finances. Those who treat company funds as “their own” could be in for a costly shock!

In the above example, let us assume that the director withdrew £50,000 (over and above salary payments) during the company financial year 1 April 2020 to 31 March 2021. On 31 March 2021, the company had distributable reserves of £10,000, from which a dividend was paid. The situation would be as follows:-

Director’s loan: £50,000
Dividend: £10,000

Rather than take receipt of the £10,000 dividend payment, this would be offset against the £50,000 debit on the director’s loan account. Leaving a net debt of £40,000 that would need to be repaid at some point.

Benefit in kind

In certain circumstances, the debit on a director’s loan account is considered a benefit in kind and therefore taxable. The conditions are as follows:-

  • The loan amount is £10,000 or more
  • No interest is being paid on the loan OR
  • Interest being paid falls below the HMRC average official rates

If these conditions are met, then you will need to record the loan on a P11D form and as part of your self-assessment tax return. As a director, you may be liable to personal taxes on the loan amount, depending on your financial situation. The company may also be liable for national insurance contributions on the loan amount at a rate of 13.8%.

Personal tax: Outstanding loan amount would be added to your annual income and taxed accordingly
National insurance contributions: 13.8% x £40,000 = £5520 (paid by company, non-refundable)

If you have an arrangement whereby you pay a commercial rate of interest on the balance of your director’s loan account, this would not be classed as a benefit in kind. Consequently, it wouldn’t be part of your self-assessment tax return.

Corporation tax

As far as repercussions for the company, if the outstanding director’s loan is repaid within nine months and one day of the company’s year-end, there is no additional tax liability. However, if the loan is not repaid in full, in the above example, before 1 January 2022, the company would be charged corporation tax at 32.5% on the outstanding balance. This is referred to as S455 tax, and while it is refundable once the director’s loan has been repaid, it may take some time to receive repayment from HMRC.

Additional corporation tax: 32.5% x £40,000 = £13,000 (refundable on repayment of loan)

Liquidating a company to avoid BBLS liability

There is some confusion about whether you can liquidate a struggling company with a BBLS liability. The simple answer is yes, but there may be consequences depending on the scenario:-

BBL used for the benefit of the company

If BBLS funds were used wholly for the company’s benefit, but the company still failed, entering administration or liquidation, this is perfectly legitimate. In this scenario, directors would have no personal liability towards the outstanding BBL. As an unsecured loan, the banks would usually be treated the same as any other creditor. However, as the UK government guaranteed the BBLS, this would protect banks from any losses.

BBL is not used per the terms

The terms of the BBLS dictate that the funds received from the UK government are used for the company’s benefit. However, if a company entered administration/liquidation with evidence that BBL funds had been misused, this is a very different scenario. If misuse was proven, then the company’s directors could be made personally libel for repayment of the outstanding balance.


As a director, it is essential to be aware of legitimate ways to withdraw funds from a company. If any withdrawn funds are not classified as salary, dividends or expenses, they will be debited to your director’s loan account. As covered above, there are clear regulations governing the use of director’s loan accounts and the repayment of outstanding balances. This issue is sure to come to the fore in years to come, with concerns that some directors have used BBLS funding for non-company activities.












Chris Wilkins FCCA is a Chartered Certified Accountant, Registered Auditor and the managing partner of Wilkins Southworth based in Barnes, South West London

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