CR: Hi everyone. Since the beginning of this Covid crisis, we’ve been in constant conversation with company directors about the impact on their businesses and on themselves. The focus to date has been on what government support is available and Graeme Blair, who is head of our business tax team is with me today to actually go through some of the questions that our clients have been asking us and try to address some of them. So Graeme, what are the main things that company directors of owner managed businesses have been asking you?
GB: Well, the government has provided four different types of support and if you look at all four of them, they are really cash flow driven, ie that they are trying to maintain the cash inflow of the business so that it doesn’t have to shed staff and lose sales. The government has four different types of support that help businesses maintain their viability and ultimately maintain their staffing.
The four areas are VAT deferral, statutory sick pay relief for SMEs, the coronavirus business interruption loan for SMEs and the job retention scheme.
Looking at the VAT deferral first, this is relatively straightforward. Any VAT liability coming out of a return for the quarters ended February, March or April are automatically deferred until 31 March, 2021.
The return has to be submitted in the normal way. It’s simply automatically deferred and the business does not have to pay that liability until March, 2021 at the latest. It can obviously choose to pay the liability at an earlier date.
Statutory Sick Pay
CR: Okay, great. And then I think the second one that people were talking about was the statutory sick pay.
GB: Statutory sick pay was one of the first announcements from the government. The government was recognising the employees were going off sick and they brought forward the date from which statutory sick pay can be claimed off the government. It’s a relatively modest relief, but when you have large numbers of employees, the benefit can mount up.
Coronavirus Business Interruption Loan Scheme (CBILS)
CR: So, obviously as you said at the beginning, cash flow is the most important thing for everyone and everyone’s very keen to get their loans through from the government. Can you tell me what the issues are and what people are asking about that?
GB: The first question I’m being asked is, am I eligible? This is a turnover test and the support package under the coronavirus business interruption loan scheme or CBILS for short applies to SMEs with a turnover of up to £45 million. If you have a business with turnover in excessive of £45 million, there’s a different scheme that we could come onto later. This is a government backed finance scheme where up to £5 million, is offered over a six year period with the government covering the financing costs. That being interest and setup fees for the first 12 months, 80% of the loan is guaranteed by the government and as long as the loan is less than 250,000 pounds, there are no personal guarantees required of the shareholders.
CR: Because there was some confusion about that earlier, wasn’t there? About the personal guarantees.
GB: There was. And to be fair to the government, they stepped in quickly when they saw that the personal guarantees were being asked in situations that were not expected and clarified the legislation.
CR: Is it just loans or are there other facilities?
GB: It’s not just loans. Most businesses, it’s fair to say, are probably looking at loans, but the government support covers loans, overdrafts, invoice discounting and asset finance.
CR: Okay. What about loans in excess of £250,000?
GB: For loans of more than £250,000, it is the decision of the lender whether they seek personal guarantees or not. Even if personal guarantees are requested, there’s some protection for the shareholder as the personal guarantee cannot cover the lender’s personal home. The logic behind the government, excluding the primary home from the personal guarantee is to give some form of comfort that the shareholder will never be destitute, even if the loan goes bad.
CR: And how do companies and company directors go about applying for these loans?
GB: Well, interestingly, the guidance says that one should approach one’s lender in the normal way. Now the practical problem is lenders have been the same as other sectors and staff for self-isolating. This means that the numbers of staff at the banks who can process the applications is relatively limited and this has generated some discomfort amongst the directors who are looking for faster decision making than is currently being offered.
The lenders are short staffed at the moment for obvious reason and they are directing that potential borrowers apply via the website. The websites are generally asking for the normal information that one would anticipate in respect of a loan such as accounts, cash flow forecasts and evidence of the continued sustainability of the business.
CR: And is that the same for all lenders? There has been some chat about different lenders taking very different approaches. Have you seen any of that and would you have anything to say if someone wasn’t getting the answers they wanted and perhaps wanted to go to a new lender?
GB: Certainly different lenders are looking at different lending criteria, but that’s normal. In normal times you go to two different banks and what they look at or their credit committee looks at is subtly different. So at the fine margins, yes there will be a slight difference, but as a generality, the sort of information that lenders are looking for is pretty standard. If your own bankers do not provide the service or turn you down, well there’s always the opportunity to go to another one of the accredited lenders.
However, I have seen one corporate financier make the comment that why would one bank take on another’s problem? And what he meant by that was if the business is primary bankers were on the accredited list and turned down a loan application because they didn’t meet the appropriate criteria, why would another bank take on that customer and have that same potential risk?
CR: Okay. So given what you just said about resourcing within banks and the speed of turnaround, when do you think some businesses might be seeing the benefits of these loans?
GB: Well, that unfortunately is the million dollar question. There are stories at the moment about the difficulty of making contacts with banks. I saw an article in one of the broad sheets very recently that said in the first few days of the CBILS loan scheme, more than 100,000 applications had been made. Now even in normal times banks don’t have the staff to process that level of application and therefore I think there is going to be a slight delay in actually receiving the money and the message out there for directors is; you must talk to your customers and talk to your suppliers. If your suppliers are pushing for payment, actually give them the confidence that you are going through the application process but it is not being resolved yet.
One banker pointed out, banks were just given a few hours’ notice of the introduction of CBILS and expected to have the systems and processes and staff available to meet the demand and yet the government’s job retention scheme, which we’ll come onto shortly. The government are giving themselves possibly as many as six weeks to get the scheme up and running and therefore it’s no wonder that the banks are feeling slightly frustrated at any criticism that they are being slow in responding.
Coronavirus Large Business Interruption Loan Scheme
CR: In the introduction, you were talking about CBILS being available for businesses with turnover below £45 million. What about those private businesses that do turnover more than that?
GB: There is quite a separate scheme called the Coronavirus Large Business Interruption Loan Scheme for businesses with turnover of between £45 million and £500 million. The details of the scheme are not known yet and the scheme will be open sometime in April. Current indications are that the sort of information that the CBILS scheme is expecting for credit committees to approve loans will probably be the same sort of information that the banks and lenders will look for, for the large business scheme.
However, there has been a concern that when the large scheme was first announced, the government said, and I quote, “lenders are expected to conduct their own usual credit risks”. Now, anyone who’s been through financing through credit committee and through the banking relationship knows that credit committees can take a long time to make a decision and therefore if lenders are expected to conduct their usual credit risk, there is a concern that this large business scheme will take a considerably large amount of time to come to fruition.
Job Retention Scheme
CR: Okay. But no doubt we’ll update people when that happens. So let’s move on to the thing that I know has occupied most of the conversations, which is the job retention scheme. Can you outline that for us and how that’s going?
GB: Of course, the whole basis of the job retention scheme is the government’s stated desire to prevent employers making people redundant. And so what the government are doing is they’re providing funding to allow employers to retain individuals on salary through the P.A.Y.E system without having to make them redundant. Effectively, the employer pays wages through the payroll. And some of those wages are subsidised by the government. The amounts of claim per employee is 80% of their wages up to a maximum of £2,500 per month. And wages for these purposes include employer’s national insurance, and any auto enrolment contribution that is made.
CR: Okay. Can you clarify what furloughing means for me?
GB: Furloughing is an expression that means an individual is still employed, but they’re simply frozen in their requirement to do duties. So effectively furloughed individuals are being paid not to work.
CR: So how does that affect, for example, family businesses where they might be company directors that still have duties to perform?
GB: That’s a very good question and one that has been clarified recently. For family businesses with more than one director, it’s possible to furlough some directors and retain other directors on the payroll in the normal way undertaking director’s duties. For husband and wife companies, it’s possible that one spouse could be furloughed and the other remain in employment undertaking company activities. The difficulty is single director companies. It’s recently been confirmed that these individuals can furlough themselves, but part of the requirement is that one does not work when one is furloughed.
And therefore if one is a director of a single director company and one furloughs oneself, one cannot do trading matters. Trading matters, some of them are obvious such as making sales or dealing with suppliers, others are less so obvious such as VAT returns and company secretarial matters. What has recently been confirmed is that the statutory obligations of companies such as company secretarial matters are not considered trading if one is furloughed and therefore a director can furlough themselves and still run the company at the administrative side but they can’t deal with trading matters.
CR: Okay, so could you phase your furloughing to qualify it has to be three weeks, isn’t it? So could you furlough yourself for a period and then work for a week and catch up on what your duties require you to do and then furlough yourself again?
GB: Certainly that has been a suggestion as the furloughing process is still relatively new based on the legislation or the announcements that is a possibility. And actually with time we will see how the government reacts to that proposal.
CR: So we’ve talked about company directors. Can you furlough partners in partnerships?
GB: If you have partners who are subject to P.A.Y.E and national insurance and that generally applies to salaried partners or partners who are taxed under P.A.Y.E because of something called the salaried members legislation that you can furlough them.
CR: Is there anyone you can’t furlough?
GB: Individuals who provide their services through personal services companies are not employees and therefore cannot be furloughed.
GB: What those individuals will have to do is consider whether their own company will furlough themselves as previously discussed.
CR: Lots of clients who are in the hospitality and leisure sector, which obviously has been severely hit early on. What about the national minimum wage considerations when furloughing staff in that sector or others?
GB: National minimum wage increases on the 1st of April every year and 2020 has been no different for the over 24 the minimum wage is £8.72 per hour. There are plenty of sectors that traditionally pay national minimum wage with hospitality and leisure being the most often quoted. So if you have a scenario where employees are being asked to take a 20% reduction in salary so that their salary is covered by the government grant, they will therefore be paid less than national minimum wage.
Is this a concern? Well, the government has already picked up on this question and they have indicated that national minimum wage applies to payments for work. Furlough is a payment not to work and therefore they have confirmed that national minimum wage will not apply to furloughed persons.
CR: And another thorny issue. What actually constitutes pay for the purposes of working out the calculation of what the government is likely to contribute?
GB: There’s been some uncertainty about the definition of pay for these purposes. The government have confirmed that any regular payments that you are obliged to pay your employees are included within the definition. This includes, for example, wages, over-time, fees and compulsory commission payments. However, discretionary bonuses and for example, tips in the hospitality and leisure sector are specifically excluded from the definition of salary for these purposes.
The government have tried to make the calculation of qualifying pay easier by stating that if an employee has been employed for 12 months or more, then you can claim on the hire of either the same month’s earnings from the previous year or the average monthly earnings for the year to 5 April 2020.
CR: For those who haven’t already had to furlough some staff. What are the key areas you think people should consider?
GB: Obviously the most important area is the motivational effect on staff. One would have to treat the furlough process with great sensitivity. That’s a given. From an employment law perspective, the key message is that one has to be reasonable about choosing the candidates to furlough. You need to think of discrimination, for example. So let us pretend the business had 40 employees and only needed 20 of them. If there were 20 females who were furloughed and the 20 males remained in work, then there’s probably an element of discrimination there.
And therefore when one considers whom to furlough, one should retain evidence of the decision making process to show that with the benefit of hindsight it’s reasonable. There is a school of thought that says not withstanding age discrimination legislation, it is possible to furlough older staff for their own protection. For example, if you had workers over 70 with the government looking for those individuals to self isolate, you could probably furlough all your over seventeens without any risk of discrimination. That’s current thinking and obviously the fullness of time will show how accurate of you that is.
Another important feature of the furlough process is that it should be documented in writing that you have the agreement of the staff to be furloughed. From a legal perspective, this is because it’s a change of their terms of employment and therefore changes of terms of employment should be documented in writing. This is especially important if there is a likelihood of reduction of salary at the same time. Again, you need the employee’s consent. At present it’s quite challenging to get that consent in signed letter form and therefore current thinking is that email approval and email consent is appropriate.If one is looking for a staff signature of course one can’t assume that all staff have scanners and that’s probably further credence to the view that email confirmation is acceptable.
CR: So what about holiday entitlement?
GB: That’s an interesting question. There are two aspects to that question. The first is does holiday accrue to an individual who is furloughed? The second is can one force staff to take holiday during a period of furlough? Turning to the first question, yes it is a requirement that they accrue holiday whilst they are furloughed. Turning to the second question is that you can require staff to take holiday during a period of furlough. There are steps in employment law that one must follow when one is forcing staff to take holiday and the relevant employment conditions should be followed.
CR: So it sounds to me as if the employment lawyers are going to get quite a lot of enquiries coming out of this then
GB: They certainly are. If you look at a lot of the podcasts, they are all employment lawyers.
CR: So we act for lots of international companies. What about people who’ve got employees on work visas or who are not UK residents? Does that apply?
GB: That is the question of the week. That is a question that is exercising many brains at this very moment. Typically employment visas are only valid whilst the individual works for their sponsoring employer. The question is if you’re being furloughed ie: you’re being paid not to work, does the visa automatically cease to be valid? At present there’s no guidance to that question. From a practical perspective, I guess if a visa is likely to cease and there are restrictions on travel, how would an individual leave the country?
CR: What about the risks associated with having all of the staff working from home? Have people been asking about that?
GB: Yes, and there were a number of risks. Most of them are practical, but there’s a few statutory risks. Employers have an obligation to ensure that staff are safe in their workplace. At present, individual’s homes are becoming their workplace and there is very little guidance as to how employers can ensure the employees are safe in their own homes.
There are data protection concerns obviously where you have individuals working from home, they might be sending information to their home printer and they might, for example, share a flat with others who can have access to that same printer.
So there’s concerns about privacy of information and there are concerns about data security in those situations where individuals start sending work emails to private email addresses or start replying to work emails from their private email address. We’re hoping that we’ll get more guidance from the government in due course.
CR: So that was great Graeme, thank you very much. Are there any other final thoughts you would say to company directors who are mulling all these huge issues over?
GB: Well, as we said at the start, these government supports are all about cash flow support. However, the director should not consider just the short term. It’s been proven that some of the best businesses come out of these short term problems, leaner and stronger than they went in, and therefore the director should not lose focus on the longer term growth of the business just because of management of the short term crisis.
CR: So now’s the time to be thinking forward and scenario planning and making sure you’re in the best place possible.
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