Old Mill Updates

COVID-19: Chancellor announces four-point Winter Economy Plan amid fears about the impact on the economy of second wave of coronavirus infections

Today, Rishi Sunak set out his anticipated package of measures as fears mount over Britain’s fragile economic recovery and the continued risks linked to a second wave.

In a brutally candid statement to the Commons, the Chancellor confirmed that the furlough scheme will end as he argued that it’s ’fundamentally wrong’ to keep people in unviable jobs. In its place, Mr Sunak announced a new jobs support scheme designed to allow firms to preserve sustainable jobs, alongside extensions to the government-backed loan schemes and further VAT relief.

Click here for access to the government’s Winter Economy Plan.

24th September 2020

The Job Support Scheme

From 1 November, for the next six months, the Job Support Scheme will protect viable jobs in businesses that are facing lower demand over the winter months due to COVID-19.

The Job Support Scheme is built on three principles.

First, it will support ‘viable’ jobs, although the Chancellor later admitted that he couldn’t define what jobs were viable or not. The approach taken is that employees must work at least a third of their normal hours and be paid for that work as normal by their employer. The government, together with employers, will then top-up those people’s wages covering two-thirds of the pay they have lost by reducing their working hours, and the employee will keep their job.

Second, support will be targeted at firms who need it the most. All SMEs are eligible but larger businesses will qualify only when they can demonstrate that their turnover has fallen through the COVID-19 crisis. Large companies who access the scheme are discouraged from passing money onto their shareholders, through dividends or share buybacks.  Whilst there is a political justification for shareholders to be ‘doing their bit’ and not taking subsidy whilst continuing to receive their rewards, the reality is that most shares are not owned by perceived ’fat cat‘ investors, they’re largely held by the pension funds of ordinary workers so ultimately this has consequences for everyone.

Third, the scheme will be open to employers across the UK, even if they haven’t previously used the furlough scheme.

Old Mill Director, Mark Neath, said ’Essentially the government is saying it will directly support the wages of those people in work, giving businesses who face depressed demand over the winter months the option of keeping on employees in their roles albeit  on shorter hours rather than having to make them redundant. What they can no longer do is continue to pay the wages of those who aren’t coming back to work because their jobs would have ceased in reality, but for the subsidy.’

As further details begin to emerge, there are elements of the new support measures that business owners will need to consider carefully.

Neath goes on to say ‘Under this new wage subsidy scheme employees must work at least one third of their hours. They’ll then be paid two-thirds of their pay for the remaining hours (with both the employer and the government paying one-third each).

‘This is less generous than the furlough scheme in that under the new scheme, the company pays a minimum of 55% and the government pays a maximum of 22%. Employees will see lower take-home pay with the Treasury saying someone who works 33% of their hours would get 77% of their wages. However, the government contribution is capped at £697.92 per month, so for higher-earners, the employer may need to make up the difference.

It’s also worth considering that under the new arrangement, employers retaining previously furloughed staff on shorter hours can claim both the Job Support Scheme and the £1,000 Job Retention Bonus. When this new scheme is combined with that, it provides an incentive for firms to retain workers part-time until they qualify for the bonus at the end of next January (whether this then becomes a new so-called ‘cliff edge’ in terms of job losses remains to be seen).’

Another aspect of the Job Support Scheme that needs to be thought through from an employer’s perspective is that the government contribution is claimed in arrears, so there are cash flow implications of having to pay the employee before receiving reimbursement.  Companies also won’t be able to claim under the new Job Support Scheme to subsidise the wages of staff who are under notice of being made redundant. In a nutshell, employers won’t be able to claim the new Jobs Support Scheme in the period they are letting them go.

Whilst the scheme aims to stop mass job cuts as the furlough scheme is wound down at the end of October, the harsh reality is that Sunak’s new support package won’t prevent many furloughed workers from being laid off.

With an estimated 2-3 million employees still on furlough and not working at all, tough choices will have to be made and, notwithstanding today’s announcement, there are fears that many jobs will now be lost once the furlough scheme ends because struggling companies can’t justify bringing them back part-time.

Support for the Self-Employed

The Chancellor also confirmed that a similar scheme for the self-employed would be available.

The Self-Employment Income Support Scheme extension will support viable traders who are facing reduced demand over the winter months, covering 20% of average monthly trading profits through a government grant.

In summary Mark Neath comments ‘The Job Support Scheme is all about moving to a different phase. Six months ago, the focus was on supporting people to stay at home, but the government can’t fund the Coronavirus Job Retention Scheme indefinitely. My fear is that this new shift will temporarily stem but not halt the rise in unemployment.

The strange thing about this scheme is that, given all the discussion about the German ‘Kurzarbeit’ (short time working) model, this isn’t really a short hours work scheme that encourages employers to cut hours rather than jobs. The scheme is trying to drive behaviour in the opposite direction, from no hours up to one-third, instead of a temporary reduction from full-time which is how the German version works. We don’t yet know whether the incentive works in the opposite direction.

Aside from the reduced financial support, businesses will no doubt also be frustrated at having to learn to navigate a third different employment support package in less than a year.’

‘Pay as You Grow’

The second strand of Mr Sunak’s announcement was around offering longer repayment terms to businesses that have taken loans since the outset of COVID-19. Essentially, businesses that have borrowed money through the government’s loan schemes would optionally be given more time to repay the money.

More than 1 million businesses which have borrowed under the Bounce Back Loan Scheme will be offered the choice of more time and greater flexibility for their repayments. Small businesses can use a new Pay as You Grow flexible repayment system which means borrowings can be repaid over ten years, instead of the original six-year term, nearly halving the average monthly repayment.

Businesses who are struggling can now choose to make interest-only payments and anyone in real trouble can apply to suspend repayments altogether for up to six months.

The Chancellor stated that no business taking up Pay as You Grow will see their credit rating affected as a result.  It’s difficult to see how that could be achieved in practice since credit ratings are set by independent ratings agencies.

The longer repayment time will also apply to SMEs who have borrowed under the Coronavirus Business Interruption Loan Scheme (CBILS).

The loan schemes were due to end on 30 September but businesses will now have more time to apply for these loans, as well as the Coronavirus Large Business Interruption Loan Scheme and the Future Fund. The application deadline has been extended to 30 November ensuring even more businesses can benefit from government-backed support.

Support for the hospitality sector

The region’s hospitality and tourism sector has been particularly badly hit by the crisis and the latest restrictions have created even more concerns for many business owners in the sector.

To help alleviate some of the pressure, the Chancellor has decided to extend the cut in the VAT rate to 5% until 31 March 2021 in order to let hospitality and tourism businesses retain more revenue.

This cut from 20% to 5% VAT – which came into force on 15 July – had been due to expire on 12 January next year and applies to food and non-alcoholic drinks, accommodation and admission to tourist attractions across the UK.

This measure aims to support more than 150,000 businesses and help protect 2.4 million jobs through the winter according to Mr Sunak.

Old Mill’s Head of Food & Drink, Phil Mills said ‘we’re pleased to see the extension of the VAT cut but that there has to be a recognition that the hospitality industry has long been treated as a tax collector for the government whilst others in the food industry enjoy a more favourable VAT treatment (for example at 0%). Ideally, we would like to see a longer-term change particularly as we move out of the EU and start to better shape our own policies in the future.’

Deferred VAT payments

The Chancellor has also relaxed the payment of VAT in an effort to avoid a cash crunch in March next year. Several commentators, including Old Mill’s Mark Neath, have been quoted expressing their concerns over the impact of this payment on the economy so the decision to allow small businesses to spread out their VAT bill over eleven smaller payments is welcome.

In conclusion

In many ways Rishi Sunak is between a rock and a hard place in trying to tackle the financial implications six months into this dreadful pandemic. The furlough scheme was always just a bridge to help employers get through the first phase of the crisis but it couldn’t be expected to continue ad infinitum due to the astronomical costs to the country.

The new wage subsidy scheme announced today is clearly less generous with employers having to pay more than before, and employees will have to go back into work to qualify. As Sunak said, this new support aimed at those businesses and posts that are viable which sadly means that there will be some business failures and unemployment will increase – but not by as much as it would’ve done if he had pulled the plug completely.

Business owners (and indeed many employees who find themselves still on furlough) may need to adapt to the situation we find ourselves in over the coming months as we continue to navigate our way through COVID-19.

For further information on any aspect of this latest government announcement please contact your usual adviser or click here…