Covid bounce back loans, bad debts and fraudulent activity

Stuck between a rock and a hard place at the height of the Covid pandemic, facing the potential collapse of the UK economy, HMRC announced fast-track funding. While many warned at the time that the application process was open to fraudulent activity, the government distributed approaching £100 billion in grants and loans.  The bounce-back loan scheme is attracting the most interest amid concerns of bad debts and fraudulent activity on a criminal scale.

The three primary Covid support schemes

While various grants were made available at a national and local level, there were three central Covid business support schemes in the shape of the:-

  • Bounce Back Loans Scheme (BBLS)
  • Coronavirus Business Interruption Loan Scheme (CBILS)
  • Coronavirus Large Business Interruption Loan Scheme (CLBILS)

In total, the three schemes provided £79.36 billion in loan finance with the following split:-

  • BBLS accounted for the lion’s share at £47.36 billion
  • The combined value of the CBILS and CLBILS facilities was £32 billion

Any scheme providing financial support at this kind of level will, in normal circumstances, be susceptible to a degree of fraudulent activity and bad debts. However, even experienced financiers have been shocked at the estimated level of fraudulent activity with the main focus on the BBLS.

CBILS, CLBILS and finally, the BBLS

Working under conditions unlikely to be seen again in our lifetime, the UK government was forced to close down the economy and began frantically working behind the scenes to launch unprecedented support schemes. On 23 March 2020, the CBILS scheme was launched, followed by the CLBILS scheme on 20 April. But, in a sign of things to come, the initial launch of these two schemes was seen as too costly, too slow and too risky.

Senior cabinet ministers, civil servants and banking executives then held 11 days of round-the-clock meetings, which culminated in the launch of the BBLS on Monday, 4 May 2020. The funds were distributed by a range of banks in the UK, with the government providing a 100% guarantee for both outstanding capital and interest. Crucially, the borrower always remained liable for the entire debt, which did not impact lending bank balance sheets.

Before the scheme closed, there had been more than 2 million applications, with 1.56 million loans approved, equating to a staggering £47.36 billion.

A fatally flawed application process

Two years after the launch of the BBLS, Lord Agnew, a joint Cabinet Office and Treasury Minister in charge of counter-fraud, stepped down. He was highly critical of the government’s “woeful” efforts to control fraud despite warnings from leading industry bodies. Later it was also revealed that the former head of the British Business Bank, tasked with overseeing the BBLS, wrote to the UK Business Secretary warning that the scheme was vulnerable to abuse by:-

  • Individuals
  • Organised crime gangs

In initial discussions regarding the various Covid support schemes, it is well documented that the government ordered banks to dispense with credit checks. Instead, applicants only had to confirm the following details:-

  • Based in the UK
  • Business trading was impacted by Covid
  • Actively trading on 1 March 2020
  • Solvent on 1 December 2019

The dispensing of credit checks tied in with the government’s 100% guarantee and the fact that the debt would remain with the borrower. No matter how successful or unsuccessful the schemes were, no debt liabilities would be transferred to the servicing banks.

Estimated losses through fraud

While easy to look back in hindsight and identify issues and alternative actions, the fact is that the UK government was warned at an early stage about the threat of fraud. As a consequence, HMRC initially estimated that of the £47.3 billion made available to businesses, £4.9 billion was likely to be lost due to fraudulent activity. However, this figure has since been reduced to £3.5 billion after HMRC appointed PwC to review the scheme.

While there is limited data available about BBLS losses by individual banks, we know that the biggest distributors of bounce-back loans were as follows:-

  • Barclays Bank £10.9 billion
  • Lloyds Bank £9.7 billion
  • NatWest Group £9.3 billion
  • HSBC £7.4 billion
  • Santander £3.8 billion
  • Virgin Money £0.97 billion

When Lord Agnew resigned, without naming individual banks, he claimed that:-

  • 87% of loans paid to already dissolved companies came from just three lenders
  • 81% of loans granted to companies incorporated after the pandemic originated from just two banks

Even though there has been no official confirmation of the above claims, or similar accusations, we are starting to see the emergence of several distinct patterns. However, potential losses of around £3.5 billion due to fraudulent activity with BBLS applications could be overshadowed by loan defaults (including CBILS and CLBILS). Some experts suggest this figure could be as high as £20 billion!

What constitutes BBLS fraud?

While some participants may have suggested there was a degree of uncertainty at the time BBLS funding was distributed, the criteria were unambiguous. Consequently, examples of fraudulent activity include:-

  • Using funds to purchase personal assets
  • Lump-sum transfers to personal bank accounts
  • Distribution of funds to friends, family and third parties
  • Proceeds used to fund a substantial increase in director’s salaries/dividends
  • Exaggeration of turnover on application
  • Company in financial difficulties before application
  • Dissolving of the company to avoid repaying BBLS loan
  • Multiple applications
  • Creation of a new company to accommodate a fraudulent application

While there have been some high-profile prosecutions, there is much more activity behind-the-scenes.

What is the Taxpayer Protection Taskforce?

In 2021, the government announced the creation of the Taxpayer Protection Taskforce with a £100 million investment. The aim was simple; to recover as much of the billions of pounds lost via Covid support schemes as possible. 

Initially focused on the forecast £4.5 billion in fraudulent losses, the taskforce is expected to recoup just 25% or around £1.1 billion. In addition, £970 million in Covid grants have been returned to HMRC, identified as no longer required or issued in error. While funding has been made available to recruit an additional 1200 investigators, some 2300 HMRC tax compliance staff were transferred from traditional duties to Brexit and Covid-related activities. The results are, to say the least, disappointing!

The current return on investment per full-time member of the Taxpayer Protection Taskforce works out at £250,000, significantly less than the “business as usual” return of £1.3 million per person. It is also estimated that the transfer of staff has left billions of pounds of taxes uncollected. To put this into perspective, tax recovery totalled £36.9 billion in the tax year 2019/20 but just £30.7 billion in the tax year 2021/22.

Legal avenues

In addition to the Taxpayer Protection Taskforce, we have seen a significant increase in the number of HMRC investigations into BBLS-related business closures. The Serious Fraud Office has also prosecuted several directors where there has been evidence of fraudulent activity. 

If directors have participated in fraudulent activity, pursuing personal assets under proceeds of crime legislation is also possible. Even those companies legitimately closed down are receiving additional attention from HMRC, where outstanding bounce-back loans are involved.

Using cutting-edge AI technology to review BBLS claims, and gather additional information, the authorities are able to identify potential fraudulent activity much quicker.


In reality, the UK government found itself in a challenging situation with the economy grinding to a halt and businesses in dire need of rescue funding. While hindsight is a valuable tool, various parties warned the authorities that the proposed Covid support schemes were open to fraud and attracting the attention of criminal gangs.

The seemingly inefficient Taxpayer Protection Taskforce is set to close in 2023, with focus returning to more traditional investigative methods in the pursuit of outstanding Covid loans. While only a fraction of the forecast £4.5 billion in fraudulent loans is expected to be recovered, the transfer of personnel to the new task force has seen a circa £6 billion reduction in the collection of traditional taxes. While lessons will no doubt be learned, this has been an expensive exercise!


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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