News & Events
As the Prime Minister grapples with the Covid 19 pandemic, his next door neighbour, the Chancellor, is faced with presenting a Budget that is arguably the most challenging in recent memory. The UK is billions of pounds – c£400 billion – in the red and currently there is no definitive date set for the Treasury to close its cheque book of economic support measures. This means that the national debt is likely to remain relatively static for some time before it is reduced.
It is widely reported that the Chancellor will try and balance the books by clawing back money from Government departments and he will raise income through ‘hidden’ taxes – the most commonly predicted tax rise being an increase in the rate of Capital Gains Tax (CGT). We may see additional changes to the taxation system such as postponing raising the threshold for basic rate income tax and, in a nod to the government’s green agenda, raising taxes on fossil fuel industries, the easiest thing being to increase the tax on petrol and diesel at the pumps.
So, with economic re-balancing being the theme at the national level, what do we expect to be the main economic themes for the rest of the year for businesses?
Most commentators seem to agree that businesses and individuals face a debt crisis as a result of the poor trading environment in 2020 and into the first quarter of 2021. Evidence is now available to show that for many small to medium businesses, income has fallen on the one hand, whilst outgoings such as rents, mortgages and supplier bills have accrued unpaid on the other.
One explanation for rising debt is that the government brought in measures last year that slowed down the ability of creditors to pursue these types of debts through winding up proceedings. Creditors could still resort to court proceedings, which some did, but others decided not to pursue given the costs and delays involved.
Many businesses found themselves in lockdown for much of 2020 and effectively moth-balled their operations as much as possible. Some businesses used the Covid Job Retention Scheme to furlough staff; CBIL or bounce-back loans to ease their cash requirements; and they deferred payment of taxes to HMRC in an effort to balance their inability to trade properly. This however left debt because, in many cases, the deferred debts did not go away but simply accrued unpaid due to inactivity by the business and the creditor.
Government support for business
Government protections are still largely in place at the time of writing. It is widely acknowledged however that this state of affairs cannot continue indefinitely because the UK economy needs money to pass through the system to keep it functioning. Currently the economy is stifled by debts not being paid by one party to another, which ultimately has the effect of causing supply chain debt. Whilst that situation isn’t good for the economy, the challenge for government is to unlock these protections without creating a cliff edge effect for businesses.
What is clear is that whenever the protections from winding up proceedings are lifted, businesses could face the prospect of demands for payment of deferred taxes, rents, mortgages, lease payments, supplier bills – and even CBIL loan payments in the coming months. Unfortunately, unlike the Chancellor, businesses do not have the ability to tweak the fiscal system to generate cash!
Businesses and individuals do however have the ability to deal with their debts in an organised way. For example, HMRC is still accepting requests for deferment of taxes and are agreeing to Time to Pay arrangements. As we go into the new financial year, now is an ideal time to contact HMRC to discuss payment options.
It is also worth remembering that government support schemes such as CBILs are still available and lenders continue to deal with applications for support. It is worth looking at these support measures even if you were declined last year because the outlook now looks very different to where we were even six months ago.
The role of creditors
Looking beyond government support, there is no better thing to do than to speak to your creditors. Businesses throughout the economy are in a similar position to others at the present time with income generation being key. Creditors are usually equally agitated by not hearing from debtors as they are about not being paid. If you can reach an agreement to pay debts over a period of time then that is preferable to not being paid at all. You may be surprised by the number of creditors willing to agree to this approach.
Before speaking to creditors it is useful to prepare a cash flow and a balance sheet for your business so that you can have an informed conversation about deferring payments based on your assessment of the business’ financial position. There are plenty of ways to prepare this financial information. Cash flows can be as simple as listing your income and expenditure in two columns to give you a rough idea of the difference between the two.
In the worst cases, you might need professional help to deal with your debts. This is a situation where one of the insolvency processes can be used to deal with the debts owed to creditors. For example, if you have a lot of debt owed to different creditors but you want to continue to trade because your underlying business is healthy, perhaps with some changes to the business, such as terminating a lease or making redundancies, then a company voluntary arrangement might be a good option. An insolvency practitioner should be consulted to review whether that option is a viable one.
The good news is that despite all of the damage done to the economy, the Bank of England’s latest forecast predicts a Covid ‘bounce’ effect once we are away from the worst of the third lockdown and any subsequent tier system. The challenge for the Chancellor on 3 March is to maximise that bounce by encouraging economic activity whilst trying to balance his books.