The first part of our ‘Building Business Resilience and Future Success during Covid-19’ webinar series took place today. In this debrief, we share with you the recording and key insights from Maximising Cashflow with David Brookes, Tax Partner at BDO.
Firstly, we’d like to thank David for sharing his wealth of knowledge with us and we hope you and your business clients find his guidance useful.
To view the recording, please click here.
For detail on the key insights from our interview with David Brookes, please see below:
The Purchase Managers’ Index (PMI) is an excellent indicator of the health of the global economy. 50 separates growth from contraction and therefore any rating under 50 provides a negative forecast. The Eurozone manufacturing PMI fell to 33.4 in April which is the lowest since records began 23 years ago. This along with the the composite index showing manufacturing and service sectors dropping to 13.8 in April suggests we’re about to enter or are already in a severe recession comparable, if not worse than, 2008. The difference is we understand why this is happening and it’s because of government imposed measures as a result of Covid-19.
The VIX Index, which represents the volatility of the financial markets, highlights the correlation between the volatility and coronavirus cases in David’s presentation. As Covid-19 cases increased, so did volatility, however this appears to have peaked in late March as the number of Covid-19 cases dropped and so we can look to more stability as time goes on.
Whether we are looking at a V-shaped recession or a U-shaped recession, depends on a number of areas including the industry, length and scale of the lockdown and future social distancing policies. From the insight we’ve gained so far, it will be a few years before we get back to 2019 levels of activity and the government borrowing will take decades to repay. The recovery won’t be as rapid as the fall.
Government support for businesses and the self-employed
There have been a whole series of Government support packages that seem to change on a weekly basis.
The most well-known is the Coronavirus Job Retention Scheme which gives employers a grant to temporarily put staff on furlough but keep them on the payroll. The idea behind this is to smooth out the recession and keep skilled/trained employees on the books ready to go when the economy picks up. Currently available to the end of June 2020 and circa 6.3m employees have been furloughed in the UK so far.
Calculating the value of government support per employee is more complex than it seems as National Insurance contributions (NICs) and pension contributions will impact what’s available. To help, the government have created a useful calculator. It’s imperative to get this right as you only have one chance to submit a claim.
The Self-Employment Income Support Scheme will allow individuals to claim a taxable grant of 80% of their average monthly trading profits, paid out in a single instalment covering 3 months, and capped at £7,500 altogether. This is a temporary scheme, but it may be extended. The grant will be subject to Income Tax and self-employed National Insurance.
To help with cash flow, VAT payments have automatically been deferred to 31 March 2021 and Personal Tax 31 July 2020 payments can be deferred to 31 Jan 2021.
Also available are grants for businesses that pay little or no business rates which you can find more information on here.
The Coronavirus Business Interruption Loan Scheme (CBILS) provides financial support to smaller businesses affected by coronavirus (COVID-19) and the Bounce Back Loan Scheme (BBLS) enables smaller businesses to access finance more quickly during the coronavirus outbreak. Further details can be found on the government website here.
£750m of grants and loans for R&D focused SMEs will be available in May via Innovate UK.
The Future Fund, also launching in May, will issue convertible loans between £125,000 to £5 million to innovative companies which are facing financing difficulties due to the coronavirus outbreak.
Is the government support working?
The uptake of the grants available has been good. Business Rates relief is automatic and local authorities have been good at deploying grants to local businesses.
The uptake for Government backed loans is an area that has been improving with time. The government is providing security for loans made by banks and there are several schemes now available:
- C19 Corporate Financing Facility (CCFF) - for very large companies
- Coronavirus Large Business Interruption Loan Scheme (CLBILS) – for t/o £45m to £500m
- The Coronavirus Business Interruption Loan Scheme (CBILS) - for t/o up to £45m
UK Finance reported that banks managed to lend only £2.8bn via CBILS in the period up to the 21st April 2020 (out of £330bn available). 36,000 applications/ 16,500 approvals.
This low success rate is a result of several factors including:
- Significant backlog in applications meaning lenders are having to prioritise those businesses with immediate cash requirements
- There has been some misunderstanding around the eligibility criteria leading to a large number of inappropriate applications
- Lenders have to walk a tightrope between supporting their clients and remaining commercial. These commercial considerations include:
- Ensuring they do not invalidate the government guarantee by inappropriately interpreting the eligibility criteria; and
- Considering the credit on its merits as they retain a 20% exposure to losses on a pari passu basis.
The situation is improving. There are now 40 lenders and the banks are building their capacity to deal with applications. Personal guarantees will not be required for loans of <£250,000 and insufficient security is no longer a condition to access the scheme.
The turnover test was proving difficult for PE backed businesses. As per the British Business Bank guidance: “If your business is part of a group, controlled on either a legal or de facto basis, the maximum turnover applies to the group undertaking.” Lenders had interpreted ‘group’ to refer to all portfolio companies that are majority owned by a fund. Therefore, meaning that turnover across a majority owned PE portfolio is aggregated.
The government has now amended its guidance to clarify that, where a business is a PE portfolio company, only the individual portfolio company revenue should be considered and not the aggregation of the fund portfolio revenue.
Practical guidance for future success
When applying for loans, approach your incumbent lender to access the schemes, as they remain primarily focused on supporting existing clients. To improve the chances of success and speed of implementation, funding requests should:
- Robustly demonstrate financial viability of the business pre-COVID-19
- Set out a credible business plan that incorporates management’s actions to mitigate the impact of COVID-19 (e.g. cost savings, TTPA and/or JRS)
- Credibly present how the Company will recover to financial health and be capable of servicing the debt structure in 2021. (Certain lenders are suggesting plans that assume recovery during H2 2020 and normal trading in 2021).
Consider your personal tax liabilities. It may be worth looking into a Time To Pay Arrangement (TTPA) with HMRC. BDO have a support guide to help you with this.
Businesses can look at QIPs, accelerate loss claims, R&D tax credit claims, capital allowance claims, review transfer pricing policies, raise equity funding under EIS/VCT rather than loans and seek the right advice to move forward proactively.
What could a post Covid-19 future look like?
Some have described lock-down as a big experiment in home working. The ease with which people have transitioned wouldn’t have been possible 5 or 10 years ago.
Will people travel for hours for a one-hour meeting in the future? Will people fly to overseas meetings as much?
Businesses are already re-considering how much office space they really need in cities. Will a five-day week in the office resume or is more home working here to stay?
One concern is that with such a large amount of government borrowing, it will have to be paid back eventually. The question is how will we pay for it – VAT increase? IHT? A form of wealth tax?
There will be some long-lasting changes and challenges from Covid-19 to the way we all live and work – let’s hope the new normal improves family life, reduces costs and helps the environment.