Covid Reliefs Lifting

The end of COVID reliefs.. are you and your clients ready?

30 September 2021 marked the last day of various temporary reliefs introduced by the Government in the aftermath of Covid.

As a reminder:

• The Coronavirus Job Retention Scheme has enabled employees to be placed on furlough, while the Government would pay up to 80% of employee wages (to a maximum of £2,500).
• Creditors have been unable to successfully issue winding up petitions, against debtor companies who could demonstrate that they had been impacted by Covid. In reality this meant almost all petitions were suspended.
• VAT had been reduced to 5% until 30 September 2021 for the tourism and hospitality industries.

It is expected that pressure will begin to mount on many businesses who are now facing increased working capital requirements to service returning demand, in a period of growing inflation and economic uncertainty. 

End of Job Retention Scheme

The Government’s latest data showed that some 0.5m employers had 1.6m employees on the scheme up to 31 July 2021. Whilst this is a considerable reduction from the peak in May 2020 where 8.9m were on furlough, it is still a significant number. Employers will either need to find room and the money to pay these employees returning to the workplace or be faced with the difficult choice to make these employees redundant.

The impact these redundancies may then have on the wider economy remains to be seen. There is widely reported underemployment in certain sectors, e.g. hospitality and logistics but not necessarily a willingness or ability for people to transition to these sectors.

The levels of furlough fraud or overclaiming are also just being understood and this will need to be unwound over the next few years which may lead to clawback claims from HMRC against companies already laden with debt.

Reintroduction of Winding Up Petitions

Whilst creditors can once again apply for a winding up petition, there have been some changes in order to try and reduce the volume of these applications:

• The threshold for presenting a winding up petition will be increased from £750 to £10,000; and
• Creditors must write to a company asking them to put forward their proposals for repaying a debt within 21 days before proceeding with a winding up petition.

Creditors can appeal to the court to reduce the length of time they are required to provide debtor companies to put forward their repayment proposals or remove altogether. It is unclear at present what criteria the Court will require to allow a creditor to reduce the time for a repayment proposal, however, the 21 day repayment proposal will pose a risk to many creditors that assets may be dissipated during this time.

While the statutory limit increasing only appears to benefit the smaller companies who may not have creditors large enough to reach the £10,000 threshold, it may also prove difficult for those smaller creditors to pursue a debtor company where they are unaware of other creditors who may help them reach the £10,000 threshold.

With the courts expected to be dealing with a significant backlog of applications (amongst other backlogs resulting from Covid delays) it is unlikely that a winding up application will represent a particularly expedient means of recovering debt and other avenues may be preferable.

[Note: These measures are temporary and expected to run until March 2022]

Commercial Rent Arrears Recovery

Commercial landlords in England are still prevented from forfeiting commercial leases, evicting the tenant and issuing winding up petitions to tenants who have failed to pay rent or any sum that a tenant is liable for which is unpaid due, to the financial effect of Coronavirus, until 31 March 2022. This means that many landlords will not have received income from tenants for c. 2 years and is likely to be masking a number of companies who will simply be unable to cope with the cash impact of these liabilities falling due on 1 April 2022.

In order to accomodate these liabilities becoming due the government announced that it is planning to legislate to ringfence COVID related tenancy arrears that have accrued as a result of trading restrictions forced on businesses. In addition, they plan to introduce a system of binding arbitration for landlords and tenants who are unable to reach a settlement in respect of these arrears. While this may assist some tenants, it is unclear how many landlords will be willing to negotiate with tenants for the non payment of rent during this time.

VAT Emergency Cut for Tourism and Hospitality

VAT for these sectors will be increased to 12.5% between 1 October 2021 and 31 March 2022 before a planned return to 20% in April 2022. While many in these industries have enjoyed people returning to their establishments, this increase will either effect the price to the consumer or the margin enjoyed by the business. This coupled with the other reliefs lifting may begin to put cash pressure on these businesses if staffing issues continue and the post lockdown boost to demand subsides now the summer is over.

Pressure on Cashflow

In spite of Covid, liquidity has not been a particular concern for many businesses who were able to rely on an abundance of support and debt to see them through.

The removal of these reliefs from 1 October combined with some other recent changes could result in increased pressure on cash flow:

• Repayment of CBILS loans may have commenced/ will soon fall due
• Payments are now due to HMRC under the VAT deferment scheme
• Increased National Living Wage
• Retail, Hospitality and Leisure industries become liable again for rates

Companies who have not effectively prepared their business or managed their cashflow in anticipation of these reliefs lifting may begin to struggle in the short term as the increased liquidity they may have enjoyed over the last 18 months will become stretched again.

We can assist with the following areas:

• Raise funding via both debt and equity as well as refinancing existing facilities.
• Financial and strategic review of the business
• Cashflow forecasting and working capital management
• Corporate and debt restructuring

Advise directors concerned about their company’s solvency

If you have any concerns or queries in respect of how these changes may impact your business or any of your clients you are welcome to contact Tom Straw on 0207 186 1148.