Aga Khan Economic Planning Board for the United Kingdom
Summary Guidance Notes for Small and Medium-Sized Enterprises
(Last Updated: 04 April 2020)
The key immediate issues faced by businesses can be identified as follows:
• Declining sales
• Disrupted supply chains
• Employee absence due to self-isolation
• Collapse in confidence in the UK and global economy
• Declining cashflows
• Breach of financial covenants
The UK government have put together a number of schemes to help small and medium-sized businesses through these challenging times which are summarised below.
Coronavirus Job Retention Scheme
Where employers are considering making employees redundant as a result of the COVID-19 crisis, they are able to now make them "furloughed workers" instead.
If an employer chooses to furlough workers and keep them on the payroll, then the Government will contribute 80% of that employee's monthly wage costs (up to £2,500 per month) provided the employee is retained as on the payroll but does not work during the furlough period. The employer can, if they wish to do so, top up their salary, or alternatively the employee may receive the lower salary (therefore at no cost to the employer). The employer will be entitled to claim employers NICs on top of the 80% salary and the monthly £2,500 cap. Pension automatic enrolment requirements will continue to apply during the furlough period however the employer can claim the minimum employer pension contribution from the Government.
For salaried employees, the employee’s actual salary before tax, as of 28 February 2020 is used to calculate the 80% of monthly wage costs. For employees whose pay varies, (e.g. zero hours workers), the employer can claim for the higher of either the amount the employee earned in the same month last year or the employee's average monthly earnings from the 2019/20 tax year. Bonuses or any commission are not included in monthly wage costs.
The furlough must be for at least three weeks and currently the maximum furlough that will be reimbursed is three months. Employers can furlough an employee more than once, provided each furlough is at least three weeks' long.
Employees can still be made redundant during the furlough period or afterwards. The employer would have to follow the standard rules on redundancy and employees with at least two years' service would be entitled to redundancy pay
While a furloughed worker, the employee can not undertake any work or provide any service to the organisation. They can volunteer or undertake training but they will not be able to volunteer for their employer.
The employer will need to inform the employee that their status has to a “furloughed worker” and notify HMRC of this through a portal that is currently being set up (due to go live at the end of April). The UK Government has confirmed a furloughed worker is still subject to existing employment law and the existing employment contract. Therefore, it appears that an employer will need the employee's consent to do so, unless there is a provision in the employment contract allowing the employer to temporarily lay off the employee.
The scheme has been backdated to 1 March 2020 and initially be for 3 months (although the Chancellor announced it can be extended if necessary). If an employee has been made redundant since 1 March 2020, the employer can bring the employee back onto the payroll and become eligible for the scheme.
Whilst the government are still working on the logistics of the scheme and expect first payments to be made by the end of April 2020, the upfront cost of payroll will continue to be paid by businesses whilst they await the reimbursement.
All UK companies will be eligible for the Coronavirus Job Retention Scheme. The scheme will extend to all employees who are on the employer's payroll as at 28 February 2020.
Coronavirus Business Interruption Loan Scheme ("CBILS")
SMEs that are not able to obtain finance on normal commercial terms are able to apply for up to £5 million under the CBILS.
The main benefits of loans provided under the scheme are that the Government will:
(a) provide the lender with a guarantee for 80% of the outstanding loan
(b) pay the interest for the first 12 months
The borrower remains fully liable to repay 100% of the loan (as well as any interest after the first 12 months). However, these loans are likely to be particularly attractive to businesses facing a short-term cash-flow issue because they will be seen as interest-free if they are repaid within those first 12 months.
The government announced further measures to the scheme on 3 April 2020. Under the new measures:
• CBILS will be extended to all viable small businesses affected by Covid-19, and not just those unable to secure regular commercial financing;
• Lenders will be stopped from requesting personal guarantees for loans under £250,000, and operational changes will be introduced to speed up lending approvals;
• For loans over £250,000, personal guarantees will be limited to 20% of any amount outstanding on the CBILS lending after any other recoveries from business assets;
This will apply to finance already offered under the scheme, to ensure that all business owners receive the same level of government protection.
Applications: The CBILS will be operated through many banks (including most high-street banks). The application is not expected to take longer than a standard application, but when immediate liquidity is required in a distressed situation even a standard application process might entail delays.
Security: The guidance is this area is unclear but, due to the presence of the UK Government guarantee, it is expected that facilities made available under CBILS will be provided on an unsecured basis. Any CBILS facilities over £250,000 can only be made if the lender can "establish a lack or absence of security prior to businesses using CBILS" which is expected to include any assets which have already been secured elsewhere. Lenders will not be able to use anyone's primary residential property as security under the loan.
Fees: It has been confirmed that businesses will not be required to pay any arrangement fee
Decision-making on whether a business is eligible for CBILS is fully delegated to the accredited CBILS lenders, but the basic eligibility criteria are:
• the borrower being UK based with 50% of its turnover coming from trading activity;
• the funds being applied for are for business purposes and will be used to support primarily trading in the UK
• the borrower (which can include sole traders / freelancers so long as the business is operated through a business account) not having an annual turnover of more than £45 million.
• the borrower not being able to otherwise obtain finance on normal commercial terms without the need to make use of the CBILS;
• the borrower having a borrowing proposal which, were it not for the current pandemic, would be considered viable by the lender, and for which the lender believes the provision of finance will enable the business to trade out of any short-to-medium term difficulty.
The UK Government has announced that all businesses in the UK are able to defer their VAT payments for the rest of this quarter (applicable from 20 March 2020 to 30 June 2020) until the end of the 20/21 tax year. No application will be required, and any businesses wishing to defer do not need to tell HMRC prior to doing so. Businesses wishing to defer should temporarily cancel any direct debits they have set up for the payment of VAT payments to HMRC.
The Government estimates that this will be equivalent to a direct injection of £30bn of cash into the economy.
The UK Government has confirmed that all businesses in financial distress, and with outstanding tax liabilities, will be able to receive tailored support from the HMRC through the "Time To Pay" service.
Specific circumstances can be discussed with HMRC using their new COVID-19 dedicated helpline (0800 0159 559 between 8am-8pm on Monday to Friday and 8am-4pm on Saturday). Examples of arrangements that HMRC may discuss with a business are:
(a) agreeing an instalment arrangement; or
(b) cancelling penalties and interest where there are administrative difficulties in contacting or paying HMRC immediately.
Business Rate Relief
All retail, hospitality and leisure businesses in England will benefit from a 12-month business rates relief for 2020/2021. There is no rateable value limit on this relief and will therefore apply to all premises in those sectors.
It will apply to the next council bill in April 2020 and requires no action on the part of the businesses concerned.
To be eligible, the business must:
• be based in England; and
• be an occupied property wholly or mainly used as a shop, restaurant, café, drinking establishment, cinema, live music venue, for assembly and leisure, hospitality, hotels, guest and boarding premises or self-catering accommodation.
Grants for Small Business
The UK Government will provide two grants to small businesses based on their rateable value:
(a) Small Business Grant: £10,000 to all businesses regardless of sector currently eligible for small business rate relief (rateable value less than £15,000) or rural rate relief (e.g. being the sole post office in a small village).
(b) RHL Business Grant: £25,000 to all retail, hospitality and leisure businesses operating from smaller premises, with a rateable value between £15,000 and £51,000.
Businesses do not need to apply for the Small Business Grant. They will be contacted by their local authority from early April. However they will need to actively contact their local authorities for the RHL Business Grant.