In recent days the implications of the spread of COVID-19 have moved from being hypothetical and are now having a material effect on life as we know it. All indications are that current events will have far-reaching consequences into the longer term, with some predicting that this current outbreak may continue to as late as spring 2021.

At this early stage, with so much guesswork and uncertainty, it is impossible to predict the economic effects on Scotland and the wider UK, especially factoring in the effects of any wider global slowdown.  What is clear though is that the effects will be severe, certainly the most severe economic crisis we have seen since the recession and credit crunch of 2008.

With the UK Government’s recent advice against travel and unnecessary socialisation, along with the inevitable mass absences of workers arising from either illness or self-isolation, many businesses across a range of sectors are likely to be severely impacted.  This advice has now been followed up with the Government’s order that cafes, pubs and restaurants must close as of 20 March for the foreseeable future.

Against this background the Budget on 11 March the UK Government proposed a number of measures which aimed to alleviate some of business’ more immediate concerns.  A further announcement was made on 17 March which announced further increases to the funds the Government was prepared to commit, up to £330bn, with the promise that more capacity would be required if needed.

On 20 March the Government announced the Coronavirus Job Retention Scheme. This scheme, which must surely rank as one of the most remarkable economic interventions of the post-war period, aims to support employers and workers through subsidising the salaries for those who are not working due to COVID-19.  Most recently on 26 March we saw the announcement of the Self-employed Income Support Scheme which aims to support the self-employed by supportive grants.

Key elements of UK Government policy relevant to Scotland are:

  • Statutory Sick Pay (SSP) will be available to all eligible workers diagnosed with COVID-19 or self-isolating from day one of their absence.  Small and medium enterprises (SMEs) will be able to reclaim up to two weeks of COVID-19-related SSP payments for each employee from the Government.
  • Coronavirus Business Interruption Loan Scheme (CBIL) is to be facilitated by the UK government-owned British Business Bank and opened for applications on 23 March 2020.

CBIL is intended to support SMEs that are financially viable but unable to obtain finance due to having insufficient security to meet the lender’s normal requirements.  In such cases bank lending or overdrafts can be made under the CBIL scheme, with the British Business Bank providing lenders with a guarantee of 80% on each loan made under the scheme.

The CBIL scheme will support loans of up to £5m in value, though it will be for individual lenders to set their upper and lower borrowing levels against this limit.  No interest will be due for the first twelve months of the loan, though repayments of the capital may still be required.  The post-interest-free period terms will vary by lender and by product but we expect these to be in line with those available in the normal loan market.

Loans made under CBIL will be offered for a term of up to six years for term and asset finance products, with overdraft and invoice finance offered for up to three years.  Lenders, at their option, will be able to make unsecured loans for amounts up to £250,000; security will be required for loans in excess of this amount. Some lenders appear to be insisting on personal guarantee and/or security from directors or owners, but this is not a uniform requirement of all of the participating funders and in any case will depend on the status of the individual borrower group.

Businesses can apply for CBIL by approaching a participating lender – a list of the accredited lenders is set out here.

Most sectors are eligible for support (with some minor exceptions); qualifying businesses must be UK-based, with turnover of no more than £41m per annum.  CBIL is also open to sole traders, so long as they operate a business account and not a personal account.

Lenders will provide finance where there is a borrowing proposal which, were it not for the current pandemic, would be considered viable by the lender and for which the lender believes that the provision of finance will enable the business to trade out of any short to medium term difficulty.  Banks will expect to see all reasonable self-help options having been explored in respect of liquidity and cashflow, including funding from stakeholders (such as PE sponsors and other owners) and utilisation of measures such as the Coronavirus Job Retention Scheme noted below. It is clear from our initial discussions with lenders that all normal credit analysis will be carried out. The underlying business will still have to be viable, and the lending proposal will still have to make credit sense for the lender. The CBIL scheme therefore cannot be viewed by business as an easy way to unlock credit from lenders – indeed it is likely to be most useful where lenders would already have been inclined to provide funding but consider that additional security that would not otherwise be available should be taken. There are also complexities around ranking of security/subordination of debt, as well as questions of whether and how the CBIL scheme would work in a syndicated lending deal, that still have to be fully considered and resolved.

CBIL is expected to run for an initial six month period, though this will be extended as necessary.  It is expected that the pool of participating lenders will expand over the next few weeks to meet the high demand for CBIL facilities.

  • Covid Corporate Financing Facility is being made available for those businesses which are larger than SME size and which as a result are not eligible for CBIL funding.   The CCFF scheme opened on 23 March 2020 and is open to companies making a material contribution to the UK economy, generally: (i) UK-incorporated companies; (ii) companies with significant employment in the UK; (iii) firms with their headquarters in the UK.   Eligible businesses must also have an investment grade credit rating from one of the major credit rating agencies.

Under CCFF the Bank of England will provide funding by purchasing commercial paper of up to one-year maturity issued by the business through one of the participating banks. CCFF is intended to provide financing on terms comparable to those prevailing in markets in the period before the COVID-19 economic shock, and will be made available to firms able to demonstrate t that they were in sound financial health prior to the outbreak of the pandemic.

The minimum issuance is £1,000,000 and issuances must be increments of £0.1 million. The scheme will run for 12 months in the first instance but will be extended for as long as judged necessary and no limit has been placed on the funds which are being made available.

Further details, including a list of participating banks, are set out here.

  • Coronavirus Job Retention Scheme will support employers to retain workers who are not working due to COVID-19, workers on so-called furlough.  All companies in all sectors and of all sizes will be eligible to participate in the scheme under which the Government, acting though HMRC will provide a grant to subsidies 80% or each furloughed worker’s salary, up to a maximum of £2,500 per month.  It is expected that employers will be responsible for making deductions from this sum such as NIC and PAYE, therefore the take-home pay for each worker will be somewhat less than the headline figure.  It will be open to employers to supplement this grant further to bring their workers up to their full wage level.

The full details of implementation have not yet been released.  These are expected within the next few days and it is anticipated that the scheme will be up and running before the end of April at the latest. The scheme will be backdated to subsidise wages paid to affected workers from 1 March onwards.

Furloughed workers will not be permitted to undertake any work, including training. It is understood that the scheme will not cover flexible moving in/out of furlough or reduced hours and no work-related activity such as training will be permitted during the furlough period. Workers may keep in contact with the business, so long as no work is undertaken.

The Government has committed to operating the scheme for at least the next three months, with no limit on the funding which will be available.  Further extensions will be made as needed.

  • Self-employed Income Support Scheme has recently been announce, closing off a notable gap in the Government’s COVID-19 support.  Under this scheme a taxable grant will be paid to the self-employed or to partnerships with a trading profit of less than £50,000 in the 2018/19 financial year.  This grant will be worth 80% of profits, up to a cap of £2,500 per month.  Payments are expected to be made from the beginning of June 2020.

For further details on this scheme, please see our dedicated article.

  • Self assessment income tax payments which are due on account for 2019/20 and were to be paid by 31 July 2020 have been deferred until 31 January 2021. Eligibility is limited to the self-employed and does not apply to those that are in self assessment but are not self-employed. This is an automatic offer and no application is required. Self assessment returns should still be filed by their due date.  No penalties or interest for late payment will be charged in the deferral period.

  • VAT payments due over the next quarter, up to June, will be deferred.  This amounts to some £30bn of tax.  Businesses will have until the end of the financial year to settle VAT due for the deferred period.

Following the Budget, the Scottish Government announced its own raft of measures on 14 March, followed by a further announcement on 18 March. These commitments included:

  • Business rates

For the 2020-21 tax year a 100% rates relief will be introduced for all businesses in the hospitality, leisure, and retail sector. Pubs with a rateable value of less than £100,000 will benefit from rates relief of up to £5,000. More widely a 1.6% rates relief for all properties across Scotland – this measure is intended to cancel out the planned uplift which is already scheduled to take effect from 1 April 2020.

  • Small business grants

The Scottish Government also committed to establishing an £80 million fund to support the sectors facing the worst economic impact of COVID-19.  The fund will provide grants of at least £3,000 to the small businesses most affected by the current crisis.

The Scottish government also announced that businesses in receipt of Small Business Bonus Scheme or Rural Relief in terms of rates will be eligible for a grant £10,000 to assist with costs during the present crisis. Businesses in the hospitality, leisure, and leisure sector with a rateable value between £18,000–51,000 will be eligible for a grant of £25,000.

The current situation is in flux.  It is clear, both within the UK and worldwide, that there will be a huge economic impact from COVID-19.  That said, in the middle of the health emergency, both the UK and Scottish governments are clearly focused on addressing the economic fall-out no less than the only too significant human effects.

A substantial portion of the Government’s commitments are coming in the form of loan guarantees.  It remains to be seen how great business appetite will be for taking on further debt, however at a minimum it at least provides short-term help with cash flow and the support regarding business rates which has been widely welcomed. The Coronavirus Job Retention Scheme is an unprecedented intervention in the market and clearly indicates the Government’s view that the economy can rapidly bounce back once the worst of COVID-19 has passed.  If this is the case, rapid recovery can only be hindered by the effects of widespread job losses over the next few months, which is a risk the Government is using these measures to try to avoid.

The Government has committed to being responsive to the economic consequences of COVID-19 and so the current proposals, both in Scotland and the wider UK, will continue to evolve in response to this economic challenge. We will continue to update you on all Government measures and financial assistance as and when these are announced.

Please get in touch with us if you need any further information or assistance. As your trusted advisors we are here to stand with our clients at this challenging time.