Contractors, can the Winter Economy Plan help your limited company?

The speed with which the contractor business landscape continues to shift in view of the developing pandemic is not much short of break-neck, as the government continues to respond to fluctuations in coronavirus activity, writes Gareth Wilcox, partner at Opus Restructuring & Insolvency.

Winter Economy Plan

The latest developments come from the Winter Economy Plan, which was unveiled by the chancellor on September 24th 2020. 

Deferment of Corporate Insolvency and Governance Act (CIGA) measures

ContractorUK readers may recall that certain changes to help limited companies endure the pandemic were made to the insolvency regime earlier in the year, under the Corporate and Insolvency & Government Act (CIGA). These included a suspension on ‘wrongful trading’ actions being brought in relation to the period ending yesterday -- September 30th 2020.  To further assist financially-challenged directors, there was also a prohibition on suppliers enforcing certain termination clauses against insolvent companies, and a prevention on the issuing of statutory demands and winding-up petitions (precursors to creditor-enforced insolvent liquidations), for the same period.

Note, the only exception to the statutory demand and winding-up restrictions are where the creditor can show coronavirus has not had a financial impact on the company, or that the debt would have arisen even if coronavirus had not had a financial impact on the company. Most commonly, this is proven by showing that the debt arose prior to the Covid-19 outbreak.

Well, on the very same day that we got the Winter Economy Plan (WEP), the government said these provisions will be amended, such that the prohibition on statutory demands and winding-up petitions remains in force and will now run until December 31st 2020. The same extension applies to the termination clauses. 

However, it is worth noting that the suspension clauses relating to wrongful trading have not been extended, and therefore they concluded yesterday. Consequently, directors of companies such as those run by contractors must now, more than ever, keep a close eye on their financial position to ensure that they do not fall foul of these regulations.

Additionally, but less relevant for most contractors, companies and other qualifying bodies with obligations to hold Annual General Meetings will continue to have the flexibility to hold these meetings virtually -- until December 30th 2020.

Autumn Budget sighs (of relief)

Another aspect we’ve previously briefed Contractor UK readers about is the announced review into Capital Gains Tax. For coming at a tax-tinkering time where politics still plays, the review has led to speculation that rates of CGT may increase and indeed that Entrepreneurs’ Relief – rebranded Business Asset Disposal Relief -- may be further reduced or withdrawn.

In the past week however, it has been confirmed that due to the recent spike in Covid-19 cases and associated heightening of restrictions to prevent the spread of the pandemic, no Autumn Budget will take place this year. This has caused a sigh of relief among business-owners and those contractors who were rushing through closure plans to ‘beat the budget’ and any associated tax rises. 

Yet it should be borne in mind that it remains the case that taxes are likely to rise in the medium term and there are time restrictions for applying to Entrepreneurs' Relief (and BADR too). So the shelving of the Budget should be viewed as a welcome opportunity for contractors to consider their options under a quieter ticking clock, but it’s not an indefinite stay of execution for the current regime. 

Furthermore, contractors will likely hear some commentators saying that tax rises are not likely (or wise) in the short-term, but it is clear that the books will need to be balanced at some point, and that balance to be redressed will be considerable.

Job Support Scheme

The flagship and most headline-generating announcement from the Winter Economy Plan is what the government, under what seems like ever-increasing pressure, has pulled out of the bag to replace the Coronavirus Job Retention Scheme (CJRS), the final October 1st phase of which starts today. This replacements to the CJRS – the JSS -- has come about because it is widely accepted that with the economy continuing to struggle, a sudden end to the furlough scheme would likely have given rise to a huge number of redundancies. 

Positively for firms trying to plan, the government had already confirmed it would not extend the CJRS beyond October 31st 2020 and it still won’t. It has, instead, replaced it with the Job Support Scheme (JSS). Under it, the government will:

  • support up to one-third of an employee’s usual pay (capped at £697.92 per month) from November 1st 2020, provided that they are working 33% of their usual hours. 
  • for every hour not worked, with the employer, pay out one-third of the usual pay (up to the cap), such that the employees will receive at least 77% of their pay (where the government contribution has not been capped.)  

Employees must not be on redundancy notice during the scheme. But the JSS will be open to all PAYE-registered employers, although large businesses will be required to demonstrate that their business has been ‘adversely affected’ by COVID-19, and are expected not to be paying dividends to shareholders while on the scheme.

The JSS is clearly welcome news for the business community because it means some support will continue.

But there are several shortcomings.  Firstly, the support is only available for ‘viable’ employers.  The question of viability is crucial, since it suggests that any industries still shut down as a result of Covid-19, or Covid-19 containment measures, will miss out on support. Furthermore, ongoing assessments of viability will depend on the current state of the pandemic and any associated lockdown measures. This is key because the scheme requires the employer to be able to employ staff on at least a part-time basis to participate and be eligible. Full guidance from HM Treasury is anticipated, but clearly many sectors are likely to miss out on the scheme.

An additional issue is that the payments to be received under the JSS are paid in arrears by the government. As such, employers will face a cashflow constraint having made payments to employees before receiving the support. While this may only be for a short time, some employers may not be able to suffer this in the short-term where Covid-19 has had a significant impact on cashflow.

CBIL/BBIL Extensions

The Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS) have both been extended to new applicants until November 30th 2020. Additionally, the Winter Economy Plan contains measures to limit or pause the amount of BBIL repayments during periods of financial difficulty, and there are measures to potentially double the overall term of both CBIL and BBIL loans to ten years.

The increased flexibility of repayment terms indicates a recognition by the government that the economy is unlikely to have recovered to enable CBIL and BBILs to be repayed over the intended five-year term, with repayments starting 12-months from drawdown. It had initially been feared that the start of repayments could have given rise to a wave of insolvencies when loans were called back in, forcing the government to act.

However this also indicates that the government has every intention of recovering the monies advanced, even if this must be done over a longer period. There had been some speculation that in certain circumstances the loans (in particular BBLS), may eventually have been re-categorised as ‘grants.’ That no longer appears to be the case. As such, while repayments can now be mitigated, they must be taken into account in business planning going forward. The extended term also, rather bleakly, gives rises to the unpalatable reality that companies may be paying back their Covid-19 deficit for a decade.

Lastly, consider before any action that while these support loans are government-backed and (apart from CBILS over £250,000) do not include personal guarantees, in order for the government support to be triggered, a lender would first need to exhaust recovery avenues against the company it has lent to. This may include issuing a winding-up petition against the company, which could result in its liquidation. As such, directors of companies in receipt of CBILS and BBILS must have regard to the repayment obligations. 

Misc (or rather, the main take-away?)

Contractors balking at the idea of debt, more debt, or either of these usually unwanted financial positions now spreading over a full 10 years, will probably agree with the contractor accountant who regards the WEP’s best offering as extra time to pay VAT and income tax.

VAT deferment

It’s true that an anticipated trigger for mass insolvencies was March 2021 -- the date on which deferred VAT which was payable on the quarter to June 2020 was due to be repaid. The chancellor used his plan to confirm that deferred VAT will now be capable of being paid in 11 instalments during 2021-22, under a New Payment Scheme which limited companies will be able to ‘opt-in’ to in early 2021. 

This will no doubt serve as a welcome relief to those companies (of which there were over half a million), including PSCs, who opted to defer the June quarter and were concerned with the looming double-payment in March 2021.

Time to Pay for self-assessors

It’s got to be a helpful bolt-on that fresh support was announced for self-assessment taxpayers, who will now be able to spread payments which would have been due in January 2021 over an additional 12 months (for liabilities up to £30,000). This includes deferred liabilities which were initially due in July 2020, meaning that those individuals who took up that option, can now spread payments to January 2022.

Viable for you?

Looking back over these quite numerous announcements from the chancellor’s WEP, it is clear that it’s the breadth and not just the speed of government measures in response to the coronavirus that is significant, so much so that not everyone can keep up. Whether for limited company contractors – who have no choice but to keep up to keep afloat -- these measures will prove to be ‘viable,’ remains to be seen.

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Written by Gareth Wilcox

Gareth Wilcox is a Partner and Licensed Insolvency Practitioner with Opus Restructuring & Insolvency.  As well as heading up Opus’ Birmingham office, he oversees the solvent restructuring team and has significant experience in this area

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