On March 17 and 20, 2020, the UK Chancellor of the Exchequer announced a set of "unprecedented" economic measures to further support UK businesses and mitigate the economic disruption caused by the coronavirus pandemic ("COVID-19"). Subsequently, a number of complementary measures have also been announced.
As part of these measures, the UK government will make available to UK businesses an initial £330 billion of government-backed and guaranteed loans, make a material contribution to the salary and wage bills of employees who are furloughed in connection with the pandemic and financially support the self-employed. HM Treasury and the Bank of England (the "Bank") have also launched major financing schemes to help UK businesses bridge COVID-19 related disruption to their cash flows.
These measures are in addition to those initially announced by the Chancellor in his March 11, 2020 Budget presentation and by the three policy committees of the Bank on the same day, and updated on March 19, 2020. The two authorities hope that their concerted action will have maximum impact in reducing the economic shock.
The UK government has also obtained new legal powers via the Coronavirus Act 2020 (the "Act"), which received royal assent on March 25, 2020 after a rapid passage through parliament. The Act enables the UK government to offer any further financial support that is required in order to prevent, mitigate or compensate for the impact of COVID-19 on UK businesses. This memorandum outlines the recent economic and fiscal measures proposed by the UK government, and certain other developments likely to be relevant to UK businesses.
I. Bank Rate cut
The Bank's Monetary Policy Committee ("MPC") voted at a special meeting on March 10, 2020 to cut the Bank's base rate of interest ("Bank Rate") by 50 basis points to 0.25%. However, by March 19, 2020, the MPC found that conditions in the UK gilt market had deteriorated and UK and global financial conditions had generally tightened, prompting the MPC to reduce Bank Rate further to 0.1%, its lowest level ever.
The reduction in Bank Rate is intended to support business and consumer confidence during the COVID-19 outbreak and bolster the cash flows of businesses and households. It reduces the cost, and improves the availability, of finance – handy, given the significant funding measures included in the package of measures (and discussed below).
II. Salary and wage support for all UK employers
On March 20, 2020 the Chancellor announced the 'Coronavirus Job Retention Scheme', pursuant to which any UK employer, regardless of size and sector, can receive government funding to cover 80% of an employee's salary or wage, up to a maximum of £2,500 per month, if they are furloughed but kept on the payroll in connection with the pandemic, rather than made redundant. Employers can top-up the amounts paid by the UK government, but they do not have to.
In guidance published last night, the UK government confirmed that:
- employers can, in addition, claim the cost of paying employer National Insurance contributions and the minimum employer pension contributions required under auto-enrolment in respect of the government-funded portion (for which the employer remains responsible, unless an employee has opted out of auto-enrolment). Further guidance on how to calculate these amounts will be issued in due course;
- an employee will be considered "furloughed" if they are placed on a leave of absence by their employer, for a minimum period of 3 weeks, and they do not undertake any work or generate any revenue for their employer during that period. An employee can be furloughed more than once in consecutive periods;
- the scheme is available to any UK business, charity and public authority who established a PAYE scheme before February 28, 2020 and has a UK bank account;
- provided they were hired and on the payroll on or before February 28, 2020, claims can be made in respect of any employee regardless of whether they are employed on an indefinite or fixed term contract or on a full-time, part-time or zero-hours basis;
- the scheme is also available to employees who have been made redundant since February 28, 2020 if they are re-employed by the same employer, as well as to employees who have been placed on unpaid leave since that date. It remains unclear whether the scheme can be used in cases where employees elect to take extended periods of unpaid parental leave to look after children following school closures;
- vulnerable employees shielding in accordance with government guidance can be furloughed. However, the scheme is not intended to apply to employees during periods of incapacity for work or while they are self-isolating in accordance with government guidance. Such employees should instead receive Statutory Sick Pay (see further, part IV para D. below) and may be entitled to receive enhanced contractual sick pay from their employer during the relevant period, but can be furloughed thereafter;
- where an employee's pay varies and they have been employed for less than 12 months, the claim amount should be an average of their monthly earnings. If they have been employed for more than 12 months, it should be the higher of the same month's earnings in the previous year or their average monthly earnings in the 2019-20 tax year;
- however, fees, commission and bonuses should not be included when calculating the claim amount; and
- employers should notify employees in writing of their status as furloughed workers, and keep a record of that communication.
Claims under the scheme can be backdated to March 1, 2020 and the scheme will be made available initially for 3 months, although the Chancellor reiterated in his public address that there were no financial limits to the scheme, which would be extended if necessary.
The UK government's expectation is that an online claim portal will be established by the end of April, 2020.
If any employee has been identified as being at risk of redundancy, the option of being placed on furlough could naturally be discussed in the context of individual and/or collective consultation as a way of avoiding (or postponing) the dismissal. However, as a general matter, employers are unlikely to have either an express or implied unilateral right to place an employee on furlough on reduced pay and so the arrangement should be discussed and agreed with each affected employee (and/or their representatives in the case of collective redundancies) as a temporary variation of contract.
III. Financial support for larger UK businesses
HM Treasury and the Bank have launched the Covid Corporate Financing Facility ("CCFF") to provide funding to businesses by purchasing, at a minimum spread over reference rates, newly issued commercial paper of up to one-year maturity and meeting certain other eligibility criteria issued by non-financial businesses (including their finance subsidiaries) which are considered to make a material contribution to the UK economy.
Funding will be provided on terms comparable to those prevailing in markets in the period before the COVID-19 economic shock, and will be open to firms that can demonstrate they were in sound financial health prior to the shock (i.e., companies that had a short or long-term rating of investment grade, as at March 1, 2020, or equivalent). The scheme is intended to help such businesses across a range of sectors that have been affected by a short-term disruption of cashflow to finance their short-term liabilities.
UK incorporated companies, including those with foreign-incorporated parents and a genuine business in the UK, companies with significant employment in the UK or firms with their headquarters in the UK, should normally qualify for the CCFF scheme. Eligibility decisions will be made by the Bank's risk management staff.
Commercial paper issued by non-bank financial companies will in principle be eligible, subject to the Bank being satisfied that the company makes a material contribution to corporate financing in the UK.
Commercial paper issued by leveraged investment vehicles or from companies within groups that are predominantly banks, investment banks or building societies will not be eligible.
Purchases will be made in the primary market via eligible dealers and after issuance from eligible counterparties in the secondary market.
The CCFF will operate for at an initial period of 12 months, and the Bank will provide 6 months' notice of withdrawal of the facility.
More information regarding the operation of the CCFF can be found in our memorandum, and on the Bank's website.
IV. Financial support for small- or medium-sized UK businesses
A. Term Funding Scheme and increased asset purchases
The MPC also voted on March 19, 2020 to enlarge the new Term Funding scheme with additional incentives for Small and Medium-sized Enterprises ("TFSME"), which was announced on March 11, 2020 and to increase the Bank's holdings of UK government and sterling non-financial investment-grade corporate bonds by £200 billion (to a total of £645 billion). The additional purchases of bonds (the majority of which will comprise UK government bonds) and the TFSME scheme will be financed by the issuance of central bank reserves.
The TFSME scheme will offer, over the next 12 months, four-year funding of at least 10% (increased from an initial 5% allowance) of banks' lending to the real economy at interest rates at or close to Bank Rate. Additional funding will be available for banks that increase lending, especially to small and medium-sized enterprises ("SMEs"). It is anticipated that the TFSME scheme will:
- help transmit the effect of the reduction in Bank Rate to the real economy;
- provide participants with a cost-effective source of funding to support additional lending to the real economy; and
- incentivise banks to (i) provide credit to businesses and households to bridge through a period of economic disruption; and (ii) support lending to SMEs that typically bear the brunt of economic downturns.
Institutions eligible to participate in the TFSME will be banks and building societies that are participants in the Bank's Sterling Monetary Framework ("SMF") and that are signed up to access the Discount Window Facility ("DWF"). SMF participants that are not already signed up to the DWF can apply for access alongside applying to use the TFSME. Institutions that are not currently SMF participants can apply to join, subject to the Bank's usual eligibility criteria. Collateral must be pre-positioned with the Bank. Eligible collateral will consist of all collateral currently eligible in the SMF.
The Bank estimates that this scheme should lead to around £100 billion being provided in term funding.
B. Contingent Term Repo Facility
On March 24, 2020 the Bank announced that it was activating the Contingent Term Repo Facility ("CTRF"), as a temporary enhancement to its existing sterling liquidity insurance facilities, with operations initially run on March 26, 2020 and running again on April 2, 2020.
The CTRF is a flexible liquidity insurance tool that allows participants to borrow central bank reserves (cash), in all major currencies, in exchange for collateral. Eligible collateral comprises collateral assets eligible in the SMF. The CTRF is open to banks and building societies that signed up to the DWF.
The CTRF will provide funding for a period of 3 months, which will allow participants to use the CTRF as a way to bridge beyond the point at which drawings under the TFSME can be made, in order to support lending to the real economy as quickly as possible.
The size of the CTRF operations will be unlimited, and the price will be a fixed rate of Bank Rate plus 15 basis points. A maximum of 1 bid will be accepted from a single participant. The minimum bid size will be £5 million, with increments of £1 million.
The Bank will keep the operation of the CTRF under review. Further operations will be announced as required, based on demand and market feedback.
C. Coronavirus Business Interruption Loan Scheme
On March 11, 2020 the UK Chancellor announced the 'Coronavirus Business Interruption Loan Scheme', a new temporary loan scheme delivered by the British Business Bank, which will become available the week commencing March 23, 2020.
The scheme will support UK SMEs with a turnover of no more than £45 million per year. The scheme provides participating lenders with a government-backed guarantee of 80% on each loan up to £5 million in value and, with the UK government covering the first 12 months of interest payments, seeks to bolster lenders' confidence in continuing to provide financing to SMEs.
More than 40 lenders including Barclays, RBS, HSBC and Lloyds will provide funds under the scheme as term loans, overdrafts, or asset-based lending secured on equipment or invoices. Eligibility will be determined by application.
HM Treasury estimates this scheme will unlock up to £1 billion of attractive working capital loans to support UK SMEs.
D. Support for UK employers
Employers with fewer than 250 employees (which is estimated to include approximately 2 million employers), as at February 28, 2020, will be eligible for a government refund of up to 14 days' of Statutory Sick Pay paid to any employee who, on or after March 13, 2020 is either ill or required to self-isolate because of COVID-19. Under the Act, an employer who fraudulently or negligently receives a refund is liable to a penalty not exceeding £3,000.
The Act also suggests the UK government may be considering going further, by permitting regulations to be made regarding the payment of "additional amounts" to employers who have paid Statutory Sick Pay.
Statutory Sick Pay is currently paid at a rate of £94.25 per week (rising to £95.85 from April 6, 2020) to eligible employees on a five day work schedule (with different amounts payable to those on other types of schedules), for up to 28 weeks in any period of incapacity for work, or in any series of linked periods of incapacity for work. A repayment mechanism will be established over the coming months (the Act mentions deductions from amounts otherwise payable to the UK's tax authority, HM Revenue & Customs ("HMRC") as one possible route) and, in the meantime, employers should keep accurate records of staff absences and payments of Statutory Sick Pay.
With effect from March 13, 2020, the eligibility criteria for Statutory Sick Pay have also been relaxed in two respects:
- Statutory Sick Pay is payable from the first day of sickness absence, as an enhancement to the usual rule (which provides for payment from the fourth qualifying day in any period of incapacity for work); and
- Statutory Sick Pay is payable to any employee who is ill because of COVID-19, or who is following UK government advice (available here) to self-isolate whether or not they are ill or showing any symptoms of COVID-19.
E. Grants for certain small enterprises
Approximately 700,000 small businesses that already pay little or no business rates will be eligible for £10,000 grants to help meet business costs (the UK government estimates that this is roughly the cost of 3 months of rent). Local authorities will write to businesses that are eligible for grants, and funding is expected to be provided in early April, 2020.
Additionally, a cash grant of up to £25,000 may be available for businesses in the retail, hospitality and leisure sectors operating from premises that have a rateable value (for business rates purposes) between £15,000 and £51,000.
V. Financial support for the self-employed and for members of partnerships
The UK Chancellor yesterday unveiled his much anticipated 'Self-employment Income Support Scheme', which will provide financial support to the self-employed (including members of partnerships) at a level which is the same as that provided to employees under the Coronavirus Job Retention Scheme: grants equal to 80% of average profits (in up to the last 3 tax years, if applicable) up to a cap of £2,500 per month, initially for the 3 months of March, April and May, 2020. The scheme is available to anyone who meets the following five criteria:
- You are self-employed or a member of a partnership;
- You have lost trading or partnership trading profits as a result of COVID-19;
- You have either filed a tax return for the 2018-19 tax year as self-employed or as a member of a trading partnership or, if you are late to file, you do so in the next 4 weeks;
- You traded in the 2019-20 tax year, you are trading (or would be except for COVID-19) when you apply for the grant and you intend to continue to trade in the 2020-21 tax year; and
- You have trading profits of less than £50,000 and more than half of your total income comes from self-employment. This can be demonstrated either through trading profits and total income in the 2018-19 tax year or across the 1, 2 or 3 available trading years going back to 2016-17.
The UK Chancellor believes that 95% of those who receive the majority of their income from self-employment or trading partnerships will qualify under the scheme, the remaining 5% having an average income of c.£200,000.
HMRC will be contacting potentially eligible individuals directly and invite applications once the scheme is operational, which is expected to be no later than the start of June, 2020.
Interestingly, in his public address, the UK Chancellor made what he called a "fair and reasonable observation" on the UK tax and social security system, noting that in light of parity between the scheme and the Coronavirus Job Retention Scheme, it is now much harder to justify inconsistencies in the amount of tax and National Insurance paid by employees and the self-employed "if we all want to benefit from State support". Whilst refusing to provide any further details at this time, he declared that "we must all pay in equally in future".
The scheme supplements for the self-employed the following three support measures previously announced:
- The Coronavirus Business Interruption Loan Scheme (see part IV C. above), which is available to the self-employed provided their activity is channelled through a business account;
- As described further in part VII B. below, the next income tax payments on account due under the self–assessment system, which would otherwise be due by July 31, 2020, may be deferred to the end of January, 2021; and
- The "minimum income floor" will not be applied during any period a self-employed person is required to stay at home or is ill as a result of COVID-19, nor generally from April 6 for the duration of the pandemic, if they wish to apply for monthly welfare payments (Universal Credit) to help with living costs.
VI. Coordinated action with other central banks to enhance the provision of global US dollar liquidity
In a measure that is also calculated to bolster the supply of credit to households and businesses, the Bank will join the Bank of Canada, the Bank of Japan, the European Central Bank, the Federal Reserve and the Swiss National Bank in increasing the frequency of 7-day maturity operations on their standing US dollar liquidity swap lines, which are an important liquidity backstop to mitigate strains in global funding markets, from weekly to daily. These daily operations will start on March 23, 2020 and be carried out until at least the end of April, 2020. The central banks will also continue to hold weekly 84-day maturity operations.
VII. Fiscal measures in response to COVID-19
A. Support for payment of tax
Businesses and self-employed individuals in financial distress, and with outstanding tax liabilities, may be eligible to receive support with their tax affairs through a "Time to Pay" service provided by HMRC. Arrangements are agreed on a case-by-case basis and are tailored to a taxpayer's specific circumstances and liabilities.
B. Tax deferral
The Chancellor announced, in his press conference on March 20, 2020, that the next quarter of UK value added tax ("VAT") payments (any amounts that would have been due from businesses to HMRC in the period from March 20 to June 30 this year) will be deferred. The government has now confirmed in guidance that this deferral is optional and that it does not extend to payments due under the VAT Mini One-Stop Shop (or "MOSS") regime. Businesses that opt to defer will still need to submit their VAT returns on time, but will instead be given until the end of the 2020-21 tax year to account for the relevant amounts (with the effect of easing current cash-flow problems caused by the impact of COVID-19). Late payment interest and penalties will not be charged in connection with payment deferred as envisaged by the Chancellor's announcement. The government has also confirmed that it will process VAT refunds and reclaims as normal during the deferral period.
Similarly, payments on account of income tax that are due under the self–assessment system on July 31, 2020 may be deferred to January 31, 2021. Government guidance indicates that anyone who is due to make a self-assessment payment on account on July 31 (and not just those who are self-employed) is eligible for this optional deferment, although it also states those who are able to pay their payment on account on July 31 should do so. No application is required to take advantage of the deferral and it has been confirmed that no late payment penalties or interest will be levied where payment is deferred to January, 2021. It has not been confirmed expressly that the deferral extends to National Insurance contributions that may also be due through the self-assessment system as part of the payment on account, although this is implied and would be a logical outcome.
C. Business rates relief
The UK government will introduce a business rates 'holiday' for businesses in the retail, leisure and hospitality sectors in England in the 2020-21 tax year. The scope of this measure extends to all businesses in those sectors, regardless of their size. No action is required from businesses: the measure will be applied automatically to bills for the period beginning April 2020, with existing bills being reissued where necessary to reflect the holiday.
D. Delay to imminent IR35 reforms
Reforms to the off-payroll working rules ("IR35") that would have applied for people contracting their services to large or medium-sized organisations outside the public sector will be delayed for one year from April 6, 2020 until April 6, 2021. The planned reforms are an anti-avoidance measure, aimed at contractors who are effectively providing the same service as employees, but via a limited company, giving a different tax result. Once live, they will mean that the recipient of services (where it is a large- or medium-sized organisation in the private sector) will be responsible for determining the employment status of the individual ultimately performing those services. The UK government has stressed that the delay will not become a cancellation and that it remains committed to putting the reforms in place.
VIII. Other UK developments
A. Shareholder meetings
ICSA, The Chartered Governance Institute and Slaughter and May have published guidance on planning annual general meetings ("AGMs") in the light of the COVID-19 outbreak. This guidance, which has been reviewed by the Department for Business, Energy and Industrial Strategy, suggests that companies consider their contingency plans in light of the spread of COVID-19.
The guidance notes that companies will need to consider their own individual circumstances, including their constitution, but provides a number of practical options which reflect UK regulation. These options include, for example, delaying the AGM if notice has not yet been issued; postponing the AGM or conducting a hybrid AGM, if permitted under the articles of association.
B. Operation of English Courts
The English Courts have undertaken to continue their work during the COVID-19 outbreak. Court staff are included in the scope of key workers who will be able to continue to send their children to schools despite the general school shutdown effective as of the end of the school day on March 20, 2020. However the Courts have acknowledged that "it will not be business as usual" and "there will be bumps along the road as [they] get used to new ways of working".
The Courts are actively working on processes to facilitate remote hearings via telephone or video facilities.
On March 19, 2020 the Lord Chief Justice issued a statement (available here) making it clear that the default position is now that hearings should be conducted with one, more than one or all participants attending remotely, whilst noting that attendance of hearings in person may still be necessary in some cases. The Courts have also resolved to deal with many more matters "on paper" rather than by way of a hearing.
C. Companies House services
Corporates should be aware that, as from March 17, 2020 and until further notice, Companies House has suspended all same day services due to the COVID-19 outbreak. The London, Edinburgh and Belfast offices have been closed since March 18, 2020. Any documents that would previously be sent to London must now be sent to Companies House in Cardiff which, as of March 19, 2020, remains open.1, 1, 2
Companies House have reiterated that if companies do not apply for an extension and their accounts have been filed late, an automatic penalty will be imposed, with the registrar having very limited discretion not to collect a penalty. Any appeals based on COVID-19 will be reviewed on a case-by-case basis using the existing policy for appeals based upon unforeseen poor health.
Footnotes
1 Paper documents delivered to Edinburgh must now be delivered to the Companies House letterbox next to the office building.
2 Paper documents delivered to Belfast can be delivered to the reception desk on the ground floor of The Linenhall.
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