The Chancellor Rishi Sunak announced on Thursday a new Job Support Scheme, where providing an employee works 33% of their normal hours, government will cover 33% of wages for unworked hours.
The scheme will be open to all small and medium-sized businesses, but only larger businesses which have seen turnover fall through the crisis.
Nigel Morris, tax director at MHA MacIntyre Hudson, says there is a risk some businesses in need of support will find themselves excluded.
Morris said, “The definition and criteria will determine the success of the scheme, particularly the extent of a fall in turnover required for a larger business to qualify, and how this will be quantified, audited and proven. It’s not a fool-proof measure.
“We’ve seen some businesses ‘bounce back’ and may find they match last year’s performance or experience just a small drop in turnover. But in such a volatile economic environment this may not last; the next six months could be very different. A measure based on how they’ve weathered the storm so far may exclude many businesses from support, forcing them to make staff cuts if they predict tougher times ahead.
“The Coronavirus Job Retention Scheme has been very complex for businesses to administer, and much of the over claim error rate, understood to the up to 10%, has resulted from these complexities. It’s important the new scheme is simple to administer, but robust enough to avoid fraud and properly target support. Otherwise we will see more fraud, errors and mistakes.
“The ‘guaranteed’ 77% gross pay rate seems generous, especially compared to the Coronavirus Job Retention Scheme, where support is reducing to 60% from 1 October 2020. The Jobs Support Scheme will help employees and businesses to better plan rotas and finances for the next six months, but it will be interesting to see the detail, especially the position on supporting national insurance and pension contributions.
“The scheme should work well where employers can’t provide enough work for employees, but there are sadly many cases where employers can’t provide any work at all. A targeted scheme for employers who can’t provide a ‘base’ level of work should potentially also be considered.”
Gregory Taylor, Head of Financial Solutions at MHA MacIntyre Hudson, said the Chancellor has failed to address the fact that lending is still too restrictive.
Taylor said, “The Chancellor’s largesse today is fine as it stands but still fails to address the long-standing flaw with the Covid-19 loan schemes. Of the four Covid-19 loan schemes (CBILS, CLBILS, BBLS, & The Future Fund) only the Bounce Back scheme (BBLS) is particularly effective at getting help to where it is needed. For the other schemes lending practices are too restrictive, and even good companies with solid growth prospects can’t get a look in.
“Across all schemes the overall approval rate is 63%, but this number is skewed by the Bounce Back scheme, which is running at an 82% approval rate. The Bounce Back scheme however only provides loans of up to £50,000 and the more substantial CBILS scheme, which larger SMEs desperately need access to, has a much lower approval rate of 49%.*
“One of the best moves government could make to increase approval rates would be to allow banks to make loans at 4 times a company’s EBITDA. This is the tolerance non-bank lenders employ, and would allow many more businesses to benefit. Banks are currently only making loans up to a value of 1.7 times EBITDA, so many businesses are missing out on the support they need.
“The Chancellor’s new plan also poses a few questions businesses may be wondering about. Businesses can apply for a six-month freeze on loan repayments but who gets to decide whether this is allowed, the lender or the British Business Bank? Finally, although the Chancellor has permitted businesses to extend the period over which a loan can be repaid to 10 years, we need clarity as to whether this applies to existing loans or just to those taken out after this announcement.”