A call to action to all Directors of Limited Companies – if you agree with the sentiment below then I encourage you to copy and send to:
a) the Chancellor – mailto:CEU.email@example.com
b) your local MP
Also please post on Social Media including LinkedIn.
COVID-19 Business Support
The financial support available to Limited Companies and some self employed individuals must be increased if the UK wishes to stand any chance of getting back on it’s feet economically and repaying the enormous debt the Government is incurring, caused by the impact of COVID-19. For any solution to work it must be a win:win for all parties.
Clearly, the economic challenge faced by the Government is unprecedented. The Government has been generous with making grants available to some sectors of the economy, but the financial support simply does not go far enough. It is imbalanced and distorted.
Basic economics tells us that if the Government is having to borrow money in order to give financial support, then it will, at some point be required to repay that debt. The repayment of debt can only happen once gross receipts exceed all costs. Receipts for the Government are (largely) in the form of tax receipts – VAT, Income Tax, Corporation Tax, Employee taxes etc. The bigger the economy, the bigger the receipts.
And yet the single most important ingredient that is required to create those receipts – business – is being left unsupported. If we don’t have any businesses, we won’t have an economy. And significantly, most businesses are owned by Limited Companies, not because of any tax wheeze but because the risks of business are enormous. People who run businesses are rarely rewarded for the additional risk they take, they often work considerably harder than anyone else, are always the last to be paid and act as tax collectors for the Government. In a way, they are on your side. If they fail, you fail. If they win, you win. This is very simple to understand. So why is the Government not helping single most important partner? The one sector that will enable it to survive, it is ignoring and arguably reducing its own chance of survival.
According to the Federation of Small Businesses, at the start of 2019, businesses were made up as follows;
> self employed – 3.5m
> partnerships – 0.45m
> limited companies
- > ‘one man band’ 1.0m
- > employers – 1.0m
So, who is the government not helping?
The statement made by the Chancellor was that only 5% of ’self employed’ are not eligible for the grant. Self employed = self employed + partnership (3.5m + 0.45m) 5% = 200,000
So that means all limited companies and 5% of self employed – 2,200,000 have no support – 37% of all people in business. At any level, can that be right?
Furthermore, where does the majority of the GDP come from? – well, it has to come from the employers of Limited Companies. It’s the 80 : 20 rule. If they fail, the government fail.
And if the employers fail, there are no jobs, no tax receipts, no economy. The Government will have failed.
What is wrong with Coronavirus Business Interruption Loan Scheme?
It potentially carries too much risk. The ‘guarantee’ offered by the Government is to the lender (not the borrower). It’s not a guarantee that they will be able to obtain finance, it’s a guarantee to underwrite 80% of the amount borrowed should the borrower be unable to pay. And most importantly, the borrower is always 100% liable for the debt. The Government have stated that the lender has the discretion to choose whether or not to ask for security from the borrower on the first £250k borrowed. Well, of course they will. Moreover, adequate security in the eyes of the lender is unlikely to stop with the company, it will extend to the director’s personal assets, notably their home. Can that be fair in the current times? This fundamentally illustrates the inequity of the Government’s financial support. Employees have the opportunity to have their wages covered (up to 80%), repayment holidays on mortgages and consequently, with an element of tweaking remain in a ‘steady state’. Yet the person who drives the economy must expose themselves to further debt, at this, the most uncertain time they have ever faced.
For this scheme to work the Government must agree to underwrite 100% of the amount borrowed, and thereby eliminating the request for additional security from the borrower.
Is it realistic to think that a Director can be furloughed?
The definition of ‘furlough’ is ‘to do no work’. But is it possible for a director of a company ’to do no work’ even when the company cannot trade? In just the same way as we constantly exercise to stay fit, we cannot mothball companies and expect them to reach full potential in a matter of days once we are all let outside again. For many directors (the majority) the ability to be furloughed and claim the grant from HMRC is not a realistic option. Another door closing in their faces. Can this be fair?
Does delaying tax (VAT, PAYE, Income Tax) payments help?
In the very short term, it helps cash flow and will be a welcome sigh of relief to all business owners. However, let’s not loose sight of the fact it is a loan. But it’s also a loan that needs to be repaid in full in under 12 months. That is a big ask. When businesses stop trading, they rarely sit in neutral, revenues may cease but many fixed costs keep going. The company therefore will be in a loss making position. So, the Government expects businesses in the period to 31 March 2021 to;
- > suffer trading losses.
- > make payments to the business owners from borrowed funds (so that they can live – £2,500 pm would be nice).
- > put up sufficient security (their own house if necessary) to obtain funding.
- > not do any work whilst the business cannot trade.
- > start the business up again once sanctions are lifted.
- > re-employ everyone on the same terms as when they became furloughed.
- > make sufficient profits in the few months before 31 March 2021 to:
- > repay the trading loss from the current period
- > repay the borrowings used to keep the business afloat
- > repay the postponed VAT
- > repay any postponed PAYE
- > repay any postponed Income Tax
That simply is not going to happen. Roofers are not going to be able to lay 10 roofs in a month when previously, flat out, they can do 5. Dentists can’t see double the number of patients. Businesses simply cannot exponentially expand to satisfy the points made above for so many reasons, including;
- > there is no guarantee of demand
- > the business won’t have the cash to grow that quickly.
- > there will be insufficient people able to do the work
- > there will not be enough time
- > the supply chains will be unable to cope
- > there will be fear and risk and uncertainty.
All in all, the Government, by failing to support businesses that arguably make up 80% of GDP, 80% of all tax receipts, is killing the goose that lays the golden egg. Business owners know how to run businesses, they need to be kept in the best possible shape if this Government wants to stand any chance of a rapid and effective recovery from this horrendous situation.
To simply match the payment made to employees at £2,500 pm (max), with no cap on earnings (for self employed and limited company directors) would go some small way to keeping those businesses alive. Failure to do so, prepare to fail.
I urge you to strongly consider the points made above (win:win for all parties) and the modest payment to business owners in line with others.
Mike Hutch FCA
The Peloton – Chartered Accountants