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A cashflow crunch is coming and needs to be mitigated now

As businesses start to emerge from lockdown, they need to recognise that many of them will be facing a ‘cash-flow’ crunch that will hit them hard in the New Year and repayment schemes need to be extended, says Milan Pandya.

For those businesses that have taken advantage of a number of measures introduced by Government it is likely that deferred VAT liabilities, existing corporate and personal tax liabilities will need paying in the first part of 2021 soon after the grants for the Job Retention Scheme come to an end and at a similar time to when repayments start for additional borrowings taken out under the Coronavirus Business Interruption Loan (CBIL) scheme – a cashflow crunch.

The most significant costs of a no-deal Brexit will be tariffs and quotas on EU goods coming into the UK, which will have to be paid by UK consumers. But a no-deal Brexit also means tariffs and quotas on UK goods going into the EU, which makes UK exporters even less competitive.

What’s required, and quickly, is an extended payment period so that firms do not face a cash flow crunch that could put many of them out of business.

One of the weaknesses of the CBIL scheme is that it only provided for a maximum loan facility of six years where the first year was repayment-free and the loan borrowed was to be repaid over the remaining five years. For businesses with a large deficit in their finances, or for those needing to invest to pivot their business often digitally, this is a relatively short period. Therefore, it is sensible to explore options that will extend this repayment period. The current ‘Student Loan Style’ repayment plan would link the repayments of the loans to the success of the business over a longer period. Given that such loans are already largely underwritten by the Government, it is much better for the Government and UK economy for events of default to be reduced by providing a longer time frame for repayments.

For the proposed system to work, whereby repayments are linked to the success of the business, there will have to be well thought out rules. It is clearly not appropriate for a business to pay large dividends or bonuses whilst these Government-backed loans remain outstanding, but also it would be wrong for a blanket ban on such items. When a company is profitable it has a decision to make between rewarding its staff, rewarding shareholders, investing in the future of the business or accelerating the repayment of external debt. Most businesses will undertake to do a mixture of all of these during their ordinary course of business. Any proposed new system must not restrict businesses from operating in this manner.

The critical question is to ensure any such scheme is fair. One suggestion is that there be a mechanism whereby if a company has a CBIL loan it pays a higher rate of Corporation Tax on an amount of profits equal to the borrowing, where the premium over the standard amount of tax payable is used to repay the loan. Analysis will be required to ensure fair percentages are used so that tax bills are not so high as to damage the business but also that the loans are repaid in a timely manner. Additionally, there will be need for anti-abuse measures to ensure profits are not artificially reduced or the trade and associated borrowings separated into different legal entities within a group. This is the finer detail which needs to be right to ensure this sensible concept is properly implemented.

Would you like to know more?

If you would like to discuss any of the above guidance or have other queries about how you can make the right decisions for the future of your business and your income, please contact Milan Pandya or your usual Blick Rothenberg contact.

For any press queries, please contact David Barzilay whose details are to the right.