Spring Budget 2021 – CJRS and SEISS schemes extended

The Coronavirus Job Retention Scheme (CJRS) commonly known as the furlough scheme will be extended until the 30 September 2021. The Chancellor confirmed that employees will receive up to 80% of their salary for hours not worked subject to a monthly maximum of £2,500 until the scheme ends. The CJRS will also continue in its present form for employers until the end of June 2021. As the economy reopens and demand returns, the government will introduce employer contributions towards the cost of unworked hours of 10% in July and 20% in August and September. 

The Chancellor, Rishi Sunak also confirmed that the Self Employed Income Support Scheme (SEISS) will continue for a fourth and fifth grant. The fourth grant covers the period from 1 February 2021 to 30 April 2021 and the fifth and final grant will cover the period from May onwards. The fourth grant will provide support covering 80% of average trading profits, up to a maximum of £7,500 for those who meet the eligibility requirements. The fifth and final grant will see those whose turnover has fallen by 30% or more continuing to receive the full 80% grant whilst those whose turnover has fallen by less than 30% will receive a 30% grant.

The SEISS scheme will also be extended to the newly self-employed who filed a 2019-20 tax return by midnight, 2 March 2021.

Spring Budget 2021 – Government backed loan schemes

The deadline for applications for all the government-backed loan schemes including the Bounce Back Loan scheme, Coronavirus Business Interruption Loans and the Future Fund ends on 31 March 2021.

The Chancellor did not announce any further extension to these loan schemes but instead announced that a new successor loan guarantee programme would be introduced from 6 April 2021. The Recovery Loan Scheme will allow businesses of any size to access loans and other kinds of finance between £25,000 and £10 million. The new scheme will remain open until 31 December 2021 (subject to review).

The scheme will provide further support to businesses to help them recover and grow following the disruption of the pandemic and the end of the transition period.

Under the new loan scheme, the government will provide lenders with a guarantee of 80% on eligible loans provided to UK businesses. The scheme will be open to all businesses, including those who have already received support under the existing COVID-19 guaranteed loan schemes.

The following finance options will be available:

  • Term loans and overdrafts will be available between £25,001 and £10 million per business.
  • Invoice finance and asset finance will be available between £1,000 and £10 million per business.

Finance terms are up to six years for term loans and asset finance facilities. For overdrafts and invoice finance facilities, terms will be up to three years. No personal guarantees will be taken on facilities up to £250,000, and a borrower’s principal private residence cannot be taken as security.

Further details on how to apply and details of accredited lenders will be released in due course.

Capital or debt?

What is the difference between capital and debt, and why is the distinction important?

One important distinction is that capital represents the amount of funds introduced by shareholders, partners or sole traders plus any retained profits that the business has created at any particular date. Debt on the other hand is a liability, an amount of money that has to be repaid and subject to an interest charge.

Debt is generally owed to institutions, for example banks, whereas the capital of smaller business that are not floated on a stock exchange belongs to the business, its shareholders, partners or sole traders.

The current pandemic has brought this distinction into sharp focus as businesses with substantial debt, low capital and minimal reserves will have no fat on the bone to fund loss making activity for extended periods. Businesses with significant reserves and lower debt will have had the funds to better cope with periods of reduced activity.

Once we start to emerge from lockdown, businesses would do well to set realistic targets for retaining profits just in case we encounter future COVID or similar challenges.

Claiming Self-Employed Income Support Scheme grants

Under the third Self-Employed Income Support Scheme (SEISS) grant, claimants received up to 80% of average trading profits for November and December 2020, and January 2021. This meant that a maximum grant for the three months of £7,500 was made available to those who met the eligibility requirements. The claim window for this grant has now closed.

The government has confirmed that a fourth SEISS grant will be made available from 1 February 2021 to 30 April 2021. The level of this grant and application criteria for this fourth grant will announced at Budget day on 3 March 2021.

It is likely that the same qualification rules will apply as was the case for the third grant. This means that you must be currently trading but impacted by reduced demand due to coronavirus or have been trading but temporarily unable to do so due to coronavirus disruptions.

HMRC’s guidance states that the concept of reduced demand can apply if your business has been impacted by reduced activity, capacity or demand due to coronavirus.

For example, you:

  • have fewer customers or clients than you’d normally expect, resulting in reduced activity due to social distancing or government restrictions
  • have one or more contracts that have been cancelled and not replaced
  • carried out less work due to supply chain disruptions

You cannot claim if the only impact on your business is increased costs. The SEISS grant is treated as taxable income and is also subject to National Insurance contributions.

Emerging from lockdown

The Prime Minister has set out the government’s objectives for easing lockdown restrictions.

If the planned opening of schools, social interactions and businesses is achieved without significant increases in infection, after 21st June 2021, there will be no legal limits on social contact. Which means, all businesses including hospitality and entertainment concerns will have the opportunity to reopen.

Initially, the focus is to get children back to school (from 8 March 2021). There will also be gradual relaxation in rules for mixing outdoors including outdoor sporting amenities (from 29 March 2021). From 12 April 2021, indoor leisure, increased outdoor mixing, zoos, theme parks, hairdressers and other family events will be eased.

Businesses that can take advantage of these changes will need to consider their options. Many will have had their finances stretched by the seesaw lockdowns and closures.

Now is the time to plan for recovery. Please call if you would like to discuss your options. 

What is overtrading?

A reminder that traders who buy and sell goods – wholesalers or retailers – need to be wary of the financial consequences if, as expected, pent up consumer activity leads to a surge in demand for your products from July 2021 or earlier if you can trade before 21st June 2021.

What is overtrading?

Let’s assume that the past year’s disruption has meant you have run-through your cash reserves and you basically have little in the way of liquid (cash) resources.

If you suddenly start selling at volume, with no stocks to supply orders, you may have to buy-in product or raw materials to fulfil your customers’ demands.

Wages and other costs will have to paid and your suppliers may insist on tight payment terms.

If you are offering credit terms in excess of those allowed by suppliers, the demands on your cash flow may exhaust your reserves, as cash in from customers will not – initially – cover your outgoings.

Retailers who are paid at point of sale should avoid over-trading. Those businesses most at risk are buying and selling goods, have significant fixed costs to meet and offer credit terms to customers in excess of those agreed with suppliers.

Eventually, overtrading will fix itself as the profit your increased activity generates find its way into your bank account. But you need to work out if your cash flow needs support from you or your bank until this much needed profit reaches your bank account.

We can help. Producing realistic business forecasts will identify periods when overtrading may rear its head. Please call so we can discuss your options.

How much do your customers owe you?

Many business owners are buoyed by turnover; if it’s sold it’s as good as money in the bank, but is it?

What are your credit terms? How many days do you allow your customers to keep your money before insisting they pay you?

30 days is probably the most widely used credit term, which in real terms probably means customers pay after 40, 60 days or more.

This topic has real relevance during the COVID era as many companies are having to use valuable cash reserves to fund losses. Cash in the bank is the lifeblood of businesses; run out of cash and you are dependent on personal capital, new capital from outside sources or the largesse of your bank manager.

Rishi Sunak and his team at the Treasury have done their best, thus far, to ease any COVID financial pain with various grants and soft loans. It will be interesting to see if this support continues beyond the end of April.

Meantime keep an eye on your outstanding debtors lists. Be cautious about offering extravagant payment terms to win a contract and chase payments due as soon as your credit terms are exceeded. Otherwise, you may end up out of pocket.

Financial outcomes for your business

There are three possible financial outcomes for your business, each with their own challenges:

  1. Make a profit
  2. Breakeven, or
  3. Make a loss

Making a profit

Clearly, this will be your goal. If you make profits – and taxation will never eat up all your profits – this will generate cash resources that can be accumulated in the business or used to finance working capital or other investments in equipment.

Also, importantly, profits provide the means to repay loans and reward shareholders for their investment in your business.

Profits are associated with buoyant trading conditions and provide prima facie evidence that all is well.

Breakeven 

Breaking even in this context usually means that revenue/sales are equal to all costs. No profit, no loss.

It’s the equivalent to marking time and equates to any activity producing no additional resources for your business. However:

  • You can keep your team together
  • You can maintain contact with customers and suppliers
  • Your bank will be happy as they will see that your cashflow in’s and out’s are matching.

Many businesses during the current COVID disruption would be delighted to breakeven. Those that fail will experience the last option…

Making a loss 

Losses occur when costs exceed revenue. Losses can be funded for a period of time but will be terminal for a business if, and when, cumulative losses – less any recovered taxation – exceed cash reserves or the ability of a business to borrow to cover a growing deficit.

Business owners who find themselves in this latter position should seek professional help. There are options including steering the businesses back towards breakeven/profitability.

Act early. Don’t wait until you have exhausted yourself and your remedial options. Pick up the phone, we can help.

Bounce Back Loans scheme changes

The Bounce Back Loans scheme was launched in May 2020 to provide financial support to businesses across the UK that were losing revenue and disrupted cashflow as a result of the COVID-19 pandemic. The scheme allows qualifying small businesses to borrow between £2,000 and £50,000 with no fees or interest to pay for the first 12 months. In most cases businesses receive the cash within 24 hours of approval.

The scheme was initially launched for 6 months but has now been extended a number of times (together with all the government-backed loan schemes) until 31 March 2021. This deadline may be further extended as part of the Budget measures on 3 March 2021. 

It has now been confirmed that new repayment flexibilities will be offered. These new Pay as You Grow repayment flexibilities will allow businesses to wait up to 18 months before making repayments of the loan. 

The new options will also allow borrowers to:

  1. Move to interest-only repayments for a period of 6 months (this option can be used up to 3 times).
  2. Pause repayments entirely for up to six months using a repayment holiday. This option is available once over the life of the loan. 

Additionally, borrowers will be able to extend the length of their loans from six to ten years (reducing monthly repayments by almost half).

These Pay as You Grow options will be available to more than 1.4 million businesses that have borrowed almost £45 billion through the scheme.

It is also possible to ‘top up’ existing Bounce Back Loans should additional funding be required. This top up applies to businesses who borrowed less than their maximum loan allowance. Currently, this option is set to expire on 31 March 2021. 

The scheme is available through a network of 29 British Business Bank accredited lenders including the five largest banks. Banks will not perform any forward-looking test of business viability or other complex eligibility criteria for these loans. Businesses can apply for a loan online using a short and simple online process.

Present criteria for claiming via the furlough scheme

The detailed Furlough Scheme rules were last updated 4 February 2021.

People who are unable to work can receive up to 80% of their wages. This payment is subject to a monthly maximum amount of £2,500 per employee (for hours not worked). Employers have the discretion to top-up the payments if they so wish.

To use the extended scheme – to 30 April 2021 – the steps that are required are:

  1. Check if you can claim
  2. Check which employees you can put on furlough
  3. Steps to take before calculating your claim
  4. Calculate how much you should claim
  5. Claim for your employees’ wages online
  6. Report a payment in PAYE real time information (RTI)

To be eligible to claim, employees must have been registered on their employers PAYE payroll by 23:59 on 30 October 2020.  The employer must have made a PAYE Real Time Information (RTI) submission to HMRC between 20 March 2020 and 30 October 2020, notifying a payment of earnings for that employee.

Employees employed as of 23 September 2020 and on payroll, who were made redundant or stopped working for the employer afterwards can also qualify for the scheme if they are re-employed and placed on furlough.

Employers must also have a UK, Isle of Man or Channel Island bank account.