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Is the Budget Simply About Business Survival or Will It Really Boost Turnaround and Recovery?Sajid Khan one of our Insolvency advisers gives us his thoughts on this budget for recovery rather than payback of debt.

For many months now there have been concerns and worries about the prospects for businesses that have been badly affected by Covid-19, especially those small businesses in entertainment, leisure, travel and other related services. Indeed, the Federation of Small Businesses predicted earlier this year that as many as 250,000 small businesses could go bust without sufficient on-going Government support. For us as insolvency practitioners and business turnaround and recovery specialists the question about this budget is whether it will simply help damaged businesses to just about survive or whether it will really help businesses turn their fortunes around and really recover.

Firstly, it was a Budget with few surprises.

“Most of the budget measures were well signposted in advance. Our view is that there were no real surprises and that, as a result it was a budget about recovery rather than debt payback. The key of course, is how much it will help affected businesses recover from the effects of Covid.”

“Much of the talk over the last  year of three lockdowns, has been whether the huge levels of Covid related support for businesses would simply kick the can down the road for those that were either already in difficulties (for example the Zombie companies from the 2009/10 credit crunch recession) or very quickly got into difficulties. For example, the Furlough scheme and other measures have been crucial, but businesses have still had costs to cover, and for those where income has been zero, or close to it for many months it might already be too late.”

“Undoubtedly, the business-related measures that were announced will be a big help, and I briefly summarise them here:

  • Furlough extension to the end of September 

    – with employers paying more and the Government less from 1st July.

  • Self-Employment Income Support 

    – 600,000 more people who declared themselves self-employed in the 2019-20 tax returns will now be able to benefit from the scheme.

  • Government-backed loan schemes 

    – a new Recovery Loan Scheme has been announced, introduced as the Bounce Back Loan and Coronavirus Interruption Loan schemes come to an end this month. Businesses of any size will be eligible for loans from £25,000 up to £10m through to the end of this year, with Government providing an 80% guarantee to lenders.

  • Business rates relief

    – temporary 100% tax cuts for businesses in the hospitality, retail and leisure sectors will be extended until the end of June. For the remaining nine months of the year, business rates will still be discounted by two thirds, up to a value of £2m for closed businesses.

  • Business grants for the hospitality, retail and leisure sectors 

    – £5bn has been announced in grants for businesses in the hospitality, retail and leisure sectors. In addition, English local authorities will be provided with an additional £425 million of discretionary business grant funding.

  • Hospitality sector VAT

    – the temporary reduction from 20% to 5% will continue until the end of September. Following this, an interim rate of 12.5% will be in place for up to six months, until April 2022.

The question is will this be enough? Only time will tell, of course. “One thing is for certain, and that is whilst the beginning of tapering for business support has already been announced, at some stage it will stop. And yet the Budget had no detail about the Government’s role once the COVID support measures are withdrawn.

As insolvency practitioners, we recognise the important role Government has in supporting viable restructuring and business rescue proposals and HMRC has not always taken a constructive approach to these proposals. Certainly, such long-term support will be needed.”

Two key things for businesses to be wary of

  • Government backed loan schemes still need to be repaid. 

    Many £billions were loaned out through the BBL and CBIL schemes and we anticipate the same thing will happen with the Recovery Loan Scheme. My first point is that these loans do need to be paid back at some stage. If a company cannot pay them back because it has become or was insolvent, then there is a possibility that the directors will become personally liable. It is always the case that the earlier directors talk to an insolvency practitioner when they are in financial difficulties, often on the advice of their accountants, the more we can do to help. When Recovery Loans stop, access to finance through more traditional means will be crucial.

  • The Duties of Directors at Insolvency remain the same. 

    Directors of an insolvent company, or which may become insolvent must avoid 4 sins

    : Wrongful Trading, Fraudulent Trading, preferring one creditor over another and Transactions at an undervalue. Whilst the wrongful trading provision are still suspended, directors should avoid putting themselves at risk. There will still be many businesses verging on insolvency, or becoming insolvent, due to Covid. If any of these sins are committed, personal; liability or director disqualification might be the result. We can advise directors on what measures to take to avoid breaching their responsibilities.

What About Business Asset Disposal Relief?

“Many commentators were expecting that this relief would be further curtailed or even stopped. It was not, and hence it is still an attractive option when closing solvent businesses down using a Members Voluntary Liquidation. It is still possible that the Chancellor might further curtail this benefit, if not cancel it, at some stage, and possibly as part of the Autumn 2021 statement.”

There was no mention of IR35

“In February 2021, HMRC confirmed that changes to IR35 will come into effect in April. The Chancellor said nothing about IR35 in the budget, so we must assume these changes will still happen.

The reform is designed to ensure private sector employers are responsible for assessing whether contractors need to pay income tax and national insurance contributions.

It is also aimed at preventing tax avoidance by “disguised employees” – contractors with permanent positions at companies without paying the same tax or national insurance as standard employees.

Many self-employed workers fear that the private sector will take a risk averse strategy as a result, and wrongly place contractors under the new regulations. The Association of Independent Professionals and the Self-Employed (IPSE) commented that: ‘the IR35 changes will have a disastrous impact on business. Not just the self-employed themselves, but also on their clients and the wider economy’.

If those likely to be affected by IR35 decide to close their solvent company, then of course an MVL could be the insolvency procedure to use, with Business Asset Disposal Relief still available for eligible applicants.”

Please contact our insolvency practitioners for help and advice on any of these matters

The recovery for many businesses from the damage wrought by Covid-19 is likely to be long and hard. Our first thought is always to see if turnaround and recovery is possible. If any of your clients are facing financial difficulty and you believe they would benefit from the advice of our Insolvency Practitioners, then we would be delighted to hear from you. The initial conversation is FREE of charge.

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