Covid-19 – What Lies Ahead for Directors of Businesses

Some Thoughts…..From Brendan Clarkson, Director, CVR Global

The COVID-19 pandemic has had a significant impact on the whole UK economy and whilst we all try to return to some form of ‘normality’, businesses are busy trying to assess how they will be affected and how they are going to respond. The virus is still with us, and we will have to live with its consequences even beyond the development of a widely available vaccine. There is increasing evidence of a rise in cases and the possibility of a ‘second wave’.

The majority of the Government’s support schemes will soon be winding down, so business owners should make plans to address the issues they will face into 2021.

Government’s Support during COVID-19

The Government has unleashed an unprecedented amount of support during the last six months to avoid business failures and safeguard jobs. It has implemented a range of support schemes to keep businesses afloat, but there is a limit to the funding available to continue these schemes, and they must come to an end at some point.  Measures introduced by the Government include

  • Coronavirus Job Retention Scheme (known as Furloughing)The furlough scheme has proved extremely popular with widespread take up by many businesses.  Furloughing continues to be of enormous help, especially to the hospitality and entertainment trade who are still finding it difficult to return to normal trading conditions. The scheme has to date funded employment costs totalling circa £35bn.  However, the scheme is being wound down, with employers contributing more from 1 September and is due to end on 31 October 2020.  There has been much talk of the number of jobs that may be lost when the scheme comes to an end, and the Chancellor is under pressure to extend it, or for it to be possibly targeted at specific industries.
  • Bounce Back Loan Scheme (BBL)The BBL continues to provide a lifeline to many small and medium-sized businesses who may otherwise have had to resort to expensive funding arrangements or face closure. BBL has proved to be the most successful of the various loan schemes and provides businesses with access to loans of up to £50,000, fully guaranteed by the Government, with no repayments in the first 12 months and an interest rate of 2.5% after that.  By mid-August, nearly 1.2m businesses had taken out loans totalling £35bn, which are repayable over six years.  However, concerns have been raised over the use some of the funds have been put to, and more worryingly, several surveys have suggested the level of default could be as high as 40%.
  • Coronavirus Business Interruption Loan Scheme (CBILS)Unlike the BBL which is limited to a maximum loan amount of £50,000, the CBILS provide loans of up to £5m and has provided a lifeline to many businesses especially medium-sized and large businesses. However, any borrowing in excess of £250,000 is likely to require the provision of personal guarantees. The CBILs did not initially have the anticipated level of take-up due mainly to certain of its eligibility criteria – in particular, the provision of sufficient security. It has since been significantly expanded along with changes to its features and eligibility criteria. The changes have enabled more smaller businesses across the UK impacted by the coronavirus crisis to have access to the funding they need.
  • Eat-Out to Help OutThis scheme has proved popular in kickstarting the restaurant trade, and it appears that 100m discounted meals were served during August. This scheme came to an end on 31 August, and despite the undoubted success, the underlying problems faced by the hospitality industry remain and will need addressing.
  • VAT DeferralThe Government’s financial rescue package also included the deferral of VAT due between 20 March 2020 and 30 June 2020.  This package has been taken up by many businesses, with the deferred VAT money used to support the business during the lockdown.  However, this is only a postponement of the liability, and it will need to be paid back during the first quarter of 2021.
  • Other measuresOther support measures have included the suspension of directors’ potential liability for wrongful trading, suspension of the majority of winding up petitions and halting the ability of landlords to forfeit leases.


Where do businesses go from here?

There have been signs that the UK economy is starting to recover – in fact, according to the Office of National Statistics, the UK economy grew by 6.6% in July.  However, this revival is patchy as the economy is still 12% smaller than the pre COVID output level as large parts of the economy are still trading well below pre-lockdown levels.  The High Street was already facing significant changes pre-lockdown, and these changes have now accelerated. Likewise, the hospitality sector which was faced with over-capacity will see significant change in the future.  Businesses could find that their market has completely changed or even disappeared over the last six months.  Where there are losers, there will also be winners, being those businesses that are agile and well prepared for the challenges to come.

The immediate challenge is understanding the effect of the withdrawal of the various Government schemes and the impact on cash flow.  Businesses will face significant cash outgoings not only in the run-up to Christmas but particularly during the first two quarters of 2021.  These outgoings will include:

  • Salary costs – the impact of paying 100% of staff wages from November onwards in circumstances where ‘normal’ trading may prove difficult due to social distancing measures and the potential additional impact of a ‘second wave.’
  • Deferred VAT – any VAT deferred between March 2020 and June 2020 must be paid by 31 March 2021; this will be on top of the VAT that will fall due during that quarter from regular trading;
  • Deferred personal taxes – as with deferred VAT, any deferred self-assessment income tax due on 31 July 2020 will need to be paid by 31 January 2021.  This will be a double hit as many self-employed did not benefit from the various Government assistance schemes
  • Corporation tax bills – the payment of corporation tax liabilities on 31 December 2020 in respect of companies whose accounting year ended on 31 March 2020 could add to cash-flow pressure.
  • Deferred rent payments – payment of deferred rents together with March quarter-end rents payments could cause significant cash flow difficulties. While some landlords will be accommodating and agree to extended payment terms, others will not and will inevitably consider lease forfeiture, issue winding-up petitions amongst other measures.
  • Business rates – many businesses have not paid rates in the current year, which will fall due from 1 April 2021.
  • CBILS and BBL – whilst unlikely to have been drawn down until later in the summer, repayments of the loans will fall due 12 months after drawdown, which is likely to be from June 2021 onwards.

What should they do?

Now is the time for directors to consider their COVID exit strategy and the options available.  We continue to stress the importance of financial forecasts, especially cash flow forecasts, to assess whether businesses will be able to service their obligations into 2021.

Forecasts will provide a vital insight into potential pressure points faced businesses, and this will give time to assess how these can be addressed.  It may be that clients need to identify parties who they can speak to now to agree payment plans.  These may include their suppliers, landlord or HM Revenue & Customs. Taking steps now, at an early stage, will allow them to maximise their options and help insulate their businesses from further shocks moving forwards. If it is clear that the businesses will not be able to survive, even after taking steps to smooth payments, the forecast can still be used to form the basis for discussions on potential restructuring options.

Inevitably, some businesses will not survive because they are unable to service the level of debt incurred.  However, others may survive if they seek the right advice at the right time.

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