Exploring the Help Available and Broader Issues for Business
Following our blog earlier in the month on the Coronavirus Job Retention Scheme and the issues facing employers and employees, in this article we’ll be looking at the government’s support measures for business throughout this period, and any other relevant related business issues.
Our legal team has fielded a large number of calls over the past few weeks from businesses under pressure and facing uncertainty over how long the current situation will last and how long they can survive. In an environment where many are experiencing a drop in sales, problems with the supply chain and resulting cashflow pressures, they are seeking clarity on what help is available.
This article includes comment and advice from a range of Progeny’s legal and tax advisers.
At a glance – top five tips
Below you will find a breakdown of information of government initiatives and support, and related issues. If you’re short of time, here are our at-a-glance top five tips for business.
- Engage with your lenders – if you are feeling the cashflow pinch, it is always better to be talking to your bank than not. Otherwise you may find out they take much more drastic actions than they otherwise would have done. Capital and interest holidays should be negotiable at the moment.
- Consider furloughing some staff – if business has slowed down and productivity is low, particularly if you are in retail, hospitality or leisure – rather than making staff redundant, you can furlough them. See our blog on the Coronavirus Job Retention Scheme for more info on this.
- Look at the government’s temporary funding options – the Coronavirus Business Interruption Loan Scheme has been created to provide this and HMRC is offering Time to Pay arrangements. More info on these can be found below.
- Cashflow management and forecasting is key – control overheads, chase debtors and speak to customers and suppliers – remember everyone is in the same boat.
- Take advice – we are in unprecedented trading environment and dealing with a fast-moving and constantly changing situation. Expert advice and guidance at times of crisis can be the difference between the success and failure of your business.
Government schemes and support
The government have unveiled a number of schemes and initiatives to support business during this period.
Coronavirus Business Interruption Loan Scheme (CBILS)
The Coronavirus Business Interruption Loan Scheme (CBILS) provides financial support to smaller businesses (SMEs) across the UK that are losing revenue or having problems with their cashflow as a result of the coronavirus outbreak. More than 40 banks and financial institutions will lend money to SMEs which is partially guaranteed by the UK Government.
Loan terms: The CBILs scheme provides loans from £1,000 up to a maximum of £5m per business, with interest costs covered by the government for the first 12 months. It offers a term of debt from 3 months up to 6 years and the government guarantees 80% of outstanding facility of each loan.
Your business remains 100% liable for the amount borrowed.
Two-part scheme: There are two parts to the scheme. For loans of less than £250k, no personal guarantee is now required. For loans above this threshold, personal guarantees may be required, at a lender’s discretion, but recoveries are capped at a maximum of 20% of the outstanding balance of the CBILS facility after the proceeds of business assets have been applied. A Principal Private Residence (PPR) cannot now be taken as security to support a personal guarantee or as security for a CBILS-backed facility
To be eligible your business must be a UK SME with turnover of less than £45m (50% of turnover must be derived from trading activities) as a body corporate, sole trader, and/ or partnership. You must have a borrowing proposal which would be viable, if the COVID-19 pandemic wasn’t present, that enables your business to trade out of difficulty. Businesses in agriculture, aquaculture, fisheries, banking/insurance institutions or who are otherwise state funded are not eligible.
Further considerations – Before applying businesses should weigh up all their options, such as whether taking debt on is the right decision or exploring whether they can borrow money without accessing CBILS. They should carefully consider whether they have the ability to repay the loan in the medium to long term and, if so, which type of finance is most appropriate for them (loan/overdraft/asset backed or invoice finance or a combination).
Alistair Scott-Somers, Director, Corporate Law: “To prepare for approaching a lender, businesses are encouraged to work out the ‘funding gap’ created by coronavirus, to develop a thorough and well-evidenced proposal and to take professional advice on putting it together.”
HMRC Tax Deferral and Time To Pay options
HMRC has a number of initiatives to support businesses and self-employed people concerned about not being able to pay their tax due to coronavirus.
VAT deferral: VAT payments due between 20 March 2020 and 30 June 2020 can be deferred until 31 March 2021 without interest or penalties. You do not need to tell HMRC that you are deferring your VAT payment but VAT returns must still be submitted to HMRC on time. Businesses affected are advised to cancel their VAT Direct Debits.
Deferral of Self-Assessment payment on account: the second payment on account for the 2019/20 tax year due in July 2020 can be deferred until 31 January 2021.
Time to Pay help: HMRC have set up a helpline which allows any business or self-employed individual who is concerned about paying their tax due to coronavirus to get practical help and advice. Up to 2,000 call handlers are available to support businesses and individuals when needed. The number is 0800 024 1222. As might be expected, the number is attracting a high volume of calls at present. There is also an online webchat facility available. An online portal is expected to be launched shortly. Both the helpline and the webchat facility are available Monday to Friday 8am to 4pm.
Self-Assessment, Employers PAYE, Corporation Tax and VAT can be deferred under the arrangement. HMRC will assist with setting up a Time to Pay agreement, suspending debt collection procedures and cancelling late payment penalties. Current typical responses from HMRC are to allow a three-month deferral if a business has stopped trading due to coronavirus, or a one-month deferral if it is still trading, with a review in a month’s time.
Tony Maleham, Director, Tax: “All UK VAT registered businesses can defer VAT payments due between 20 March 2020 and 30 June 2020 until the end of the tax year. This will apply to payments on account which are due between these dates. For those with existing Time to Pay arrangements in place, the deferral does not automatically apply to those due between 20 March and 30 June. HMRC are willing to defer these payments but this needs to be arranged with HMRC’s debt management department.”
Broader business issues
In addition to helping clients navigate the government’s support initiatives, we have assisted them with a wide range of further commercial issues caused by the coronavirus crisis. A selection of some of these issues is provided below.
Commercial tenants and landlords
For business tenants of commercial property, the Coronavirus Act has introduced a ‘Moratorium on Forfeiture’ for commercial tenants. This gives the tenants temporary protection for non-payment of rents by preventing landlords from enforcing their right of forfeiture and evicting the tenant. This also relates to non-payment of any sum a tenant might owe as part of their tenancy, not just rent payments.
It’s important to emphasise for tenants and landlords that the moratorium doesn’t remove the right of forfeiture, it only temporarily removes it – currently until 30th June 2020, but this may be extended. This is not a payment holiday. All amounts under the lease remain due and payable.
Julie Evans, Director, Real Estate: “The advice for tenants and landlords in this situation is, in the first instance, to initiate a dialogue and attempt to reach an agreement or voluntary arrangement for making and receiving rental payments that’s acceptable to both parties.”
In some instances, commercial tenants may have a licence agreement rather than a tenancy, however this does not automatically disqualify them from protection. Businesses are advised to investigate the terms of their license more closely and potentially take legal advice on whether or not they would still be covered by the scope of the Coronavirus Act, as there is a significant chance they will be.
The ‘Moratorium on Forfeiture’ is intended to protect commercial tenants from being evicted as a result of the coronavirus outbreak. However, it applies to businesses of all sizes, from small local companies to blue chip big brands. This has the potential to create issues for some commercial landlords who may feel they lack the might to stand up to large organisations who use the initiative as an excuse to withhold their rent payments. Landlords in this situation are advised to initiate a dialogue with their tenants, and attempt to negotiate a mutually acceptable solution like deferred payments or reduced rent. Again, legal advice can help provide a firm footing for these negotiations.
Smaller business support
There are further support measures in place for smaller businesses which may find themselves without the cashflow to meet their financial obligations. There is sector support available for businesses in retail, hospitality and leisure. All businesses in these sectors will receive a 12-month exemption from business rates, applicable from 1st April 2020 until 31 March 2021. Those businesses eligible should have seen their rates bill drop to nothing automatically on 1 April 2020.
A Retail and Hospitality Grant Scheme is also available. Businesses with a rateable value of less than £15,000 are eligible for a grant of £10,00. For those with a rateable value of between £15,000 and £51,000 a grant of £25,000 is available.
Local authorities are administering a Small Business Grant Scheme where firms who occupy a property, qualify for Small Business Rate Relief or Rural Rate Relief, will receive a grant of £10,000. Local authorities will contact businesses directly.
Enterprise Management Incentive (EMI) Scheme options
Many businesses might think about using EMI share options to incentivise their staff in the current climate.
Company valuations should be materially lower at present (which makes the EMI share options even more attractive) and EMI share options can be a useful alternative to cash in this environment. The grant of share options could also be linked with a salary reduction, with the right tax advice.
For businesses considering furloughing staff, this also has potential implications for team members with EMI options. When employees are furloughed they are prohibited entirely from working. It’s a condition of the Enterprise Management Incentive Scheme that the employee is working full time. Furloughing an employee means they fail this condition and the option loses the beneficial tax treatment of the EMI. There is a hope that the HMRC will allow a concession on this point.
Raising cash through EIS/SEIS investment
Despite the current environment, companies should still consider raising cash if they have the option of doing so using the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) schemes as a means of attracting investors in these testing circumstances.
The benefit for businesses is the capacity they offer for raising funds. The benefits for investors are the Income Tax Reliefs they offer (50% of the amount invested for SEIS, 30% for EIS) on their personal income tax bill. There is also exemption from Capital Gains Tax on earnings from the shares on disposal after three years, and in the case of any loss of investment on sale the resulting loss can be set against the investor’s income tax.
It’s worth noting that it is now more important than ever to ensure that any commercial relationship that you or your business are involved in is supported by a proper commercial contract or terms and conditions drawn up by a solicitor.
Azra Farooq, Solicitor, Commercial Contracts: “The outbreak of a global pandemic also reminds us that a correctly drafted commercial contract should include the relevant force majeure clauses to deal with situations like those we find ourselves in at present.”
Our team has been advising clients as to whether they can avoid liability for failing to fulfil contracts because their Chinese supply chain has failed to deliver by relying on “Force Majeure” (Act of God) clauses in their contracts. It’s been quite some time since these “Act of God” get out clauses have been so widely enforced and relied upon.
If you would like further advice and guidance for your business throughout this period, please get in touch, we’d be happy to help.