Financial guidance for businesses during COVID-19
Virtually every UK business is facing an economic downturn and pressure on cash flows. A combination of self-help and government support is essential to give businesses the best chance of weathering the current economic storm.
We are still open for business and supporting our clients on a daily basis. The information provided below is a summary of some of the actions businesses can take at this time. We strongly recommend that you liaise with your professional advisers to understand what these schemes and rules means for you and your business.
Coronavirus Job Retention Scheme
If you cannot maintain your workforce because your operations have been affected by coronavirus (COVID-19), you can furlough employees and apply for a grant to cover a portion of their usual monthly wage costs where you record them as being on furlough. The Coronavirus Job Retention Scheme launched on 1 March 2020 and has been extended further until 30 April 2021.
- You must pay the associated Employer National Insurance contributions (ER NICs) and pension contributions (up to the level of the minimum automatic enrolment employer pension contribution) on subsidised furlough pay from your own funds.
- An employer can, but is not obliged to, top up an employee’s salary.
- Neither you nor your employee needs to have benefitted from the scheme before to claim for periods from 1 November onwards. Claim periods from 1 November have monthly deadlines. They must be submitted within 14 calendar days of the month they relate to, unless this falls on a weekend and then it is the next working day. You can claim before, during or after you process your payroll as long as your claim is submitted by the deadline. You can no longer submit claims for claim periods ending on or before 31 October 2020.
- Any UK employer that had started a PAYE payroll scheme on or before 30 October 2020 can apply.
- The furloughed employee must have been on the PAYE payroll on or before 30 October 2020. This means that the employee must have been notified to HMRC, through a Real Time Information (RTI) submission, notifying payment in respect of that employee between 20 March 2020 and 30 October 2020.
- A furloughed employee can be on any type of employment contract – full time, part time, agency contracts and flexible or zero hour contracts.
- Once an employee has been furloughed, they must not undertake any work for the employer. They can however take part in training, volunteer for another employer or organisation or work for another employer (if contractually allowed).
- If you made employees redundant, or they stopped working for you on or after 23 September 2020 you can re-employ them and put them on furlough. This applies as long as the employee was employed by you on September 23 2020 and you made a PAYE RTI submission to HMRC between 20 March 2020 and 30 October 2020, notifying a payment of earnings for that employee. Employees on fixed-term contracts that have expired since 23 September can also be re-employed and claimed for.
- It is possible to furlough a director. HMRC has advised that whilst furloughed directors can carry out their statutory obligations as a director, they must not “do work” that would generate commercial revenue or provide services to or on behalf of the company.
- It is recommended that where directors are to be furloughed, the board should minute to formally adopt the decision, state the reasoning for the decision and the period for which it runs.
- For employees who hold an Enterprise Management Incentive (EMI) option, it has been confirmed that holders who have been furloughed or suffered COVID-19 related reductions to their working hours will retain their EMI tax advantages and reliefs. The legislation provides that failing to meet the working time requirement as a result of COVID-19 will not trigger a disqualifying event causing holders to forfeit their tax advanced status. This measure applies for the period beginning on 19 March 2020 and ending 5 April 2021.
Qualifying salary costs
- If your employee has fixed pay, you will need to identify the reference period that you will use to work out your employee’s usual wages. The reference period is the last pay period ending on or before 19 March 2020 for employees who either:
- were on your payroll on 19 March 2020, that is you made a payment of earnings to them in the tax year 2019 to 2020 which was reported to HMRC on a Real Time Information (RTI) Full Payment Submission (FPS) on or before 19 March 2020
- you made a valid Coronavirus Job Retention Scheme claim for in a claim period ending any time on or before 31 October 2020
- If the wages are not on a fixed basis, then the calculation is based on their regular, contractual pay, such as wages, compulsory commission and past overtime. It does not include discretionary commission.
The employer and employer process
- Employers must write to their employee confirming their furlough status and keep a record of the letter. If employees are on rotating or part-time furlough, this should also be agreed or confirmed in writing. A collective agreement reached between an employer and trade union is acceptable for this purpose.
- When the scheme ends, an employer can decide whether employees can return to work. The employer can decide to make an employee redundant if necessary, subject to the current rules and regulations.
- An employee can be moved off furlough at any point to return to work, and can be placed back on furlough at a later point.
- Employees on furlough retain their employment rights.
The claims process
- To access the system, you will need a government Gateway ID and password and an active PAYE enrolment.
- Claims relating to December 2020 should be submitted by 14 January 2021, and claims relating to January 2021 should be submitted by 15 February 2021.
- The employer will be responsible for calculating the claim and HMRC will be able to audit the claim retrospectively.
- Claim periods must start and end within the same calendar month.
- Payments received by a company under the scheme are treated as income for Income Tax and Corporation Tax purposes but businesses can deduct the related employment costs as usual when calculating their taxable profits.
Income Support Scheme for the self-employed
Similar to the job retention scheme detailed above, HMRC will support the self-employed with payments of 80% of the average trading profits from the tax years 16/17, 17/18 and 18/19, up to a maximum payment of £2,500 pm for 3 months. Applications for the first grant closed on 13 July 2020 and 19 October 2020 for the second. This scheme has been extended further with the availability of a third grant. This must be claimed for on or before 29 January 2021. If you were not eligible for the first and second grant based on the information in your Self Assessment tax returns, you will not be eligible for the third.
Key criteria and conditions are as follows:
- To be eligible for the third grant you must be a self-employed individual or a member of a partnership. You cannot claim the grant if you trade through a limited company or a trust.
- If you claim Maternity Allowance this will not affect your eligibility for the grant.
- You must have submitted your Self-Assessment income tax return for the tax year 18/19 (23 April is the very latest date allowed by HMRC).
- You must have traded in the tax year 19/20
- You must either be currently trading but impacted by reduced demand due to coronavirus or have been trading but are temporarily unable to do so due to coronavirus.
- You must also declare that you intend to continue to trade and you reasonably believe there will be significant reduction in your trading profits.
- To claim, you must reasonably believe that you will suffer a significant reduction in trading profits due to reduced business activity, capacity, demand or inability to trade due to coronavirus during 1 November 2020 to 29 January 2021. You must keep evidence that shows how your business has been impacted by coronavirus resulting in less business activity than otherwise expected
- Your self-employed trading profits (can be based on an average from 16/17) must be less than £50K and more than 50% of your taxable income must come from your self-employment.
Working with HMRC
Deferring VAT payments
If you are a UK VAT-registered business and have a VAT payment due between 20 March 2020 and 30 June 2020 you can choose, because of COVID-19, to defer your VAT payment.
- You must pay the deferred VAT amount by 31 March 2021 and HMRC will not charge interest or penalties on the basis that you pay it by this date.
- You still need to submit your VAT returns to HMRC on time.
- If you normally pay by direct debit and defer your payment, you may need to cancel your direct debit. For Arbuthnot Latham clients, you can do this through online banking or getting in contact with us.
Time to Pay
HMRC is allowing companies to delay paying PAYE/NIC, Corporation Tax and VAT.
- The key is to submit your payroll as you normally would, so the liability appears on their system. Once it does, you can ask to defer the payment citing financial difficulties.
- HMRC should allow debts to be paid back over 12 months in monthly instalments and there will be no penalties or fees.
- Their Time to Pay Hotline is 0800 024 1222.
Deferral of Income Tax Payments that were payable on 31 July 2020
All taxpayers who were due to pay a self-assessment payment on 31 July will now have the payment deferred automatically and will now be due 31 January 2021 (no claim is necessary). The tax is a deferral and is still payable and so monies should be reserved in a separate account if possible.
Small Business Rate Relief (SBRR)
A holiday on business rates has been introduced for retail, hospitality and leisure businesses. No business rates will apply to the sectors for the 2020/21 tax year. There is no need to apply for it. Your local council will apply the discount automatically. Small businesses in England which pay little or no business rates were entitled to a one-off cash grant of £10,000 from their local council. Businesses had to be based in England, occupy property and was eligible for SBRR on 11 March 2020. This scheme is now closed.
On 5 January 2021, the chancellor announced one-off top up grants for for retail, hospitality and leisure businesses worth up to £9,000 per property to help businesses through to the Spring. Any business which is legally required to close, and which cannot operate effectively remotely, is eligible for a grant. Businesses are to apply through their local council. The one-off top-ups will be granted to closed businesses as follows:
- £4,000 for businesses with a rateable value of £15,000 or under
- £6,000 for businesses with a rateable value between £15,000 and £51,000
- £9,000 for businesses with a rateable value of over £51,000
Speak to your Landlord
Proactively speak to your landlord with a view to negotiating potential rental holidays or rent reductions for a period of time. The government initially banned forfeiture of commercial leases from 25 March 2020 until 30 June 2020, which was subsequently extended to 31 December 2020 for non-payment of rent due to COVID-19. The liability for rent is not affected; merely the remedy of forfeiture is temporarily unavailable to the landlord.
Coronavirus Business Interruption Loan Scheme (CBILS)
This government-backed scheme is run by the British Business Bank (BBB). Following the launch of the scheme, Arbuthnot Latham has become an accredited lender. Arbuthnot Commercial ABL, our asset based lending division, is also an accredited lender of the scheme. CBILS offers affected businesses with turnover of up to £45m the opportunity to borrow £50,001 up to £5m, for a term of up to six years.
- The borrower remains fully liable for the debt.
- The government will cover the first 12 months of interest.
- No personal guarantees can be taken for facilities under £250K.
- Personal guarantees may still be required, at the lender’s discretion, for facilities over £250K, but they exclude the guarantor’s main home and 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.
Please note that as of 17 December, the Government announced that the Coronavirus Business Interruption Loan Scheme (CBILS) will be extended until 31 March 2021. Please visit our CBILS page for more information on this scheme.
Bounce Back Loan Scheme (BBLS)
The Bounce Back Loan Scheme (BBLS) was launched to enable businesses impacted by the current coronavirus pandemic to access financing quickly. This government-backed scheme is run by the British Business Bank (BBB). Following the launch of the scheme, Arbuthnot Latham has become an accredited lender, but only for existing clients. BBLS offers affected businesses the opportunity to borrow between £2,000 and £50,000 or up to 25% of the 2019 turnover (Loan capped at £50,000) for a term of six years, inclusive of a 12 month capital repayment holiday.
Please note that as of 17 December, the Government announced that the Bounce Back Loan Scheme (BBLS) will be extended until 31 March 2021. Please visit our BBLS page for more information on this scheme.
In these extraordinary times, the old adage of “cash is king” has never been more pertinent. All businesses need an accurate rolling 13-week cash flow forecast, which should be kept up to date and allow you to understand your liquidity position and potential options available to manage your cash position.
- Review your fixed and variable costs to understand what savings you can make. Make sure you are prioritising the necessary expenses and deferring any luxuries.
- Credit control remains fundamental and you should be in touch with your clients to get firm payment dates for your invoices so that you know when your cash should actually be coming in. Some blue chip clients offer early payment plans, inevitably at a fee, which given the importance of cash should be looked at.
- Make sure that you are invoicing as frequently as possible, and maintain regular contact so you know when to expect payment and are aware of any potential delays.
- Proactively speak to your key suppliers to negotiate extended credit terms – key suppliers may be willing to grant you longer terms to pay their invoices. All suppliers would rather you agree a payment date with them, rather than simply defaulting.
Relaxing of Insolvency rules
The government announced that it will suspend the insolvency rules for wrongful trading, backdated to 1 March 2020.
Under the existing wrongful trading legislation:
- As a director, you should not allow your company to continue to trade whilst you are knowingly insolvent.
- If you do trade whilst insolvent, a director has the potential to become personally liable for the company’s debts.
The government has announced a relaxation in the wrongful trading rules and issued a short moratorium, or “breathing space”, to give companies in difficulty time to explore options for a rescue.
- The above changes will be introduced in parliament at the earliest opportunity.
- If after taking advantage of the various forms of assistance available you can see that you have no hope of continuing the business, you should plan for the worst and consult an insolvency practitioner.
In addition to the various Government measures outlined above to support businesses during this time there are also a number of free resources available to companies. One of these is All Together which was formed by a group of business leaders and entrepreneurs to provide free and confidential advice and support to founders, CEOs and business owners of UK and Ireland SMEs for businesses affected by Covid-19. Their focus is primarily in the technology, consumer, retail and hospitality sectors. Further information can be found on their website.