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Should I use my bounce back loan to pay tax bills?

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Updated: 20th October 2020

The Bounce Back Loan Scheme (BBLS) was introduced by the Chancellor at the height of the coronavirus pandemic as part of a government package to assist companies and sole traders adversely affected by Covid-19.

With no repayments, interest, or fees to pay for 12 months, the Bounce Back Loan offers a vital financial breathing space to deal with the devastating economic effect of coronavirus. There are restrictions on how you can spend the money once a loan has been granted, however, so what are these limitations and can you use your Bounce Back Loan for tax bills?

How can you spend your Bounce Back Loan?

The Bounce Back Loan Scheme was created to provide emergency working capital for limited companies and unincorporated businesses, and is designed to keep your business going by paying expenses such as staff wages, supplier bills, and other creditors.

You aren’t allowed to use this loan for personal reasons – it’s designed to provide ‘economic benefits’ to your business. Furthermore, if you’re a limited company director you could a face a considerable tax charge if you withdraw the loan as personal income/a dividend and there are insufficient profits to support it.

Tax bills have been of particular concern for many businesses during the pandemic, but the government also brought in special measures that allow businesses experiencing a downturn due to coronavirus to defer some tax payments.

So should you use your Bounce Back Loan to pay tax bills?

Is paying tax bills with your Bounce Back Loan a good idea?

Self-assessment tax

If you’ve deferred your self-assessment tax until 31st January 2021 but find that you still can’t pay at that time and you owe £30,000 or less, you may be able to set up a Time to Pay (TTP) arrangement online.

In more detail, you were able to defer the second self-assessment payment on account that was due on 31st July 2020 to 31st January 2021, if you were registered for tax in the UK and experiencing financial distress due to the pandemic.

Deferring a self-assessment tax payment incurs no additional interest, and no penalties will be applied as long as you pay the outstanding sum in full by the new deadline. Setting up a Time to Pay arrangement with HMRC before the tax deadline also protects you from penalties, but interest is applied to any amounts outstanding.

A Time to Pay arrangement typically lasts between three and six months, but can be up to 12 months or more. Additionally, you’ll have to keep up with your current tax liabilities whilst repaying the arrears.

VAT

You may also have used the government’s VAT payments deferral scheme, which was introduced earlier this year to relieve some of the financial pressure on VAT registered businesses.

It allowed businesses struggling due to coronavirus to defer to the end of March 2021 the VAT that was due for the period 20th March 2020 to 30th June 2020. This scheme has now been updated to allow you to pay your outstanding VAT in instalments without penalty up to a new deadline of 30th March 2022 if you opt in.

Given these supportive measures for outstanding tax payments, and the extension to the Time to Pay scheme, it’s not necessarily a good idea to pay your tax bills with your Bounce Back Loan.

For more information on government backed loans and professional advice on whether you should pay your tax bills with your Bounce Back Loan, please contact one of our partner-led team at Real Business Rescue. We offer free same-day consultations, and operate a broad network of offices around the UK.

Keith Tully

Partner

0800 644 6080

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