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Coronavirus - UK Government’s economic assistance packages and their availability to financial services businesses - UK

  • United Kingdom
  • Coronavirus
  • Financial services and markets regulation
  • Financial institutions

07-04-2020

Background

The ongoing coronavirus/COVID-19 pandemic has quickly developed into a deep economic crisis of the like never experienced before. Many businesses, including those in the financial services sector, are facing a prolonged period of disruption to their usual operations. In certain cases, this is causing additional stress and volatility to their working capital positions and balance sheet and, potentially, their ability to retain employees.

History tells us that governments have often been slow to react to major economic crises in the past. However, given the sudden and acute impact of this crisis at both the business and individual level, governments globally have been unusually quick to act and implement schemes to support them through some of the issues arising in this difficult economic environment. While the UK Government continues to monitor the impact of this crisis, it has already announced a significant package of measures to improve market confidence and provide assistance to businesses and individuals in acute need.

 We have briefly reviewed some of the major business assistance packages and schemes introduced so far by the UK Government and discussed the likely availability of these measures to businesses in the financial services sector.

Announced assistance measures

Coronavirus Job Retention Scheme (“CJRS”) and other payment protection schemes

Under the CJRS, any UK employer (including charities and local authorities) that operates a PAYE scheme may seek assistance with paying the wages of employees who they have no work for due to the impact of COVID-19 and who would otherwise have been made redundant.

In order to qualify, a worker on any type of contract (full-time, part-time, agency or zero-hours) must be ‘furloughed’, i.e. they have been asked to stop work, but are nevertheless still employees and retained on the payroll. HMRC will reimburse employers for 80% of the salary costs of such furloughed workers, up to a maximum of £2,500 a month together with employer National Insurance Contributions and minimum automatic enrolment employer pension contributions. Fees, commission and bonuses should not be included for this purpose. The scheme will cover wages from 1 March 2020 and is initially open for a three month period. It is expected that applications for reimbursement will be managed through an online portal, which will be open to applications by the end of April 2020.

CJRS should be available for financial services companies which face large scale temporary disruption to their activities that may otherwise have resulted in redundancies. The intention is  to encourage businesses to retain their workforce thereby giving affected employees security of employment for when normality returns to their work pattern. 

Additionally, financial services businesses and employers with fewer than 250 employees as of 28 February 2020 will also be able to claim a refund of up to 14 days statutory sick pay and expenditure, for any eligible employee off work due to COVID-19 (the “Sick Pay Refund”). This is designed to encourage employers and employees to follow the “isolation” guidelines stipulated by the Government and health services.

It has also been announced that HM Treasury will pay self-employed people who earn up to £50,000 a year and who have filed a tax return for 2019, a taxable grant worth 80% of their average monthly profits over the last 3 years (up to a maximum of £2,500) if they have been adversely affected by COVID-19 (the “Self-employment Income Support Scheme”). While not directed at financial services businesses, the Self-employment Income Support Scheme has an indirect benefit to such businesses as it would assist self-employed contractors who work for and assist these businesses.

VAT and income tax deferment and HMRC’s “Time to Pay” service

Any UK VAT-registered business may now choose to defer VAT payments due between 20 March 2020 and 30 June 2020. Businesses choosing to defer such VAT payments do not need to inform HMRC of their decision, but must make those deferred payments before 31 March 2021.

This temporary VAT payment deferral is available to all UK VAT registered financial services business and could be useful in managing their working capital and other funding needs.

Additionally, all financial services businesses and self-employed people (who work within the financial services sector) in financial distress and with outstanding tax liabilities, may be eligible to receive support with their tax affairs though HMRC’s Time to Pay service.

Further, income tax self-assessment payments on account due on 31 July 2020 have been deferred until 31 January 2021. This deferral is targeted at self-employed individuals which will include individual partners in partnerships. This therefore could be a very helpful assistance measure for the financial services sector, where many businesses are organised as partnerships. Deferring these on-account tax payments could provide significant additional cashflow to support such partnerships through this period. Like the VAT deferral, there is no need to inform HMRC of a decision to defer such payments.

Coronavirus Business Interruption Loan Scheme (“CBILS”) and Coronavirus Large Business Interruption Loan Scheme (“CLBILS”)

CBILS aims to assist UK-based small or medium-sized businesses (i.e. with an annual turnover of less than £45,000,000) by giving them access to loans, overdrafts, invoice finance and asset finance up to a maximum of £5m for up to 6 years. The scheme is delivered by certain accredited lenders, to whom loan applications should be made, and coordinated by the British Business Bank.

Loans made under this scheme will be covered by an 80% government guarantee and will receive a business interruption payment from the Government to cover the first 12 months of interest and any lender fees.

In addition to the turnover requirement noted above, the eligibility criteria also includes the business: (a) not having received state aid of more than €200,000 over the previous 2 financial years; (b) having a strong borrowing proposal, but insufficient security to meet the lender’s requirements; and (c) operating within an eligible industrial sector.

However, banks, building societies, insurers and reinsurers (but not insurance brokers) (together the “Ineligible Financial Sector Businesses”) have been identified as ineligible for the purpose of this scheme. Any financial services sector business that does not fall within the list of Ineligible Financial Sector Businesses should be able to avail the benefit of this scheme provided it meets the other criteria as described above.

As a result of concerns that many mid-tier companies and businesses that do not have a rateable value were finding themselves in the gap between the CBILS and CCFF, the Government has recently announced CLBILS that is available to such mid-tier businesses.

While all the details in relation to eligibility or features of the CLBILS have not yet been released, the Government has announced that this scheme would facilitate loans of up to £25m backed with a government guarantee of 80% and that UK firms with an annual turnover between £45m and £500m would be able to apply. Unlike CBILS, the government will not cover any interest or fee payments that are due to the lender.  

It remains to be seen whether the Ineligible Financial Sector Businesses will remain ineligible for CLIBILS in the same way as CBILS. 

Covid Corporate Financing Facility (“CCFF”)

The CCFF is intended to provide liquidity to large businesses which are experiencing short-term funding problems or need to finance short-term liabilities. Under the facility, the Bank of England (“BoE”) will purchase short-term debt issued by large companies (or their finance subsidiaries) which make a ‘material contribution’ to the UK economy.

The BoE, have confirmed that this facility will be available to companies which are “fundamentally strong” and make a “material contribution to the economy”. UK incorporated companies (including those with overseas holding companies) with a genuine business in the UK, will normally meet this requirement, but the following will be taken into account, if the company: 1) is a significant employer in the UK; 2) has their headquarters in the UK; 3) generates significant revenues in the UK; and/or 4) has a significant customer base in the UK. Companies are required to demonstrate they were in sound financial health prior to the coronavirus shock, allowing the BoE to look through temporary impacts on balance sheets and cash flows from the shock itself.

However, short-term debt issued by banks, building societies, insurance companies and other financial sector entities regulated by the BoE or the Financial Conduct Authority will be ineligible for the CCFF. Leveraged investment vehicles or companies which are predominantly active in a business subject to financial sector regulation, will also not be eligible.

Business Rates Relief and Cash Grants

There are a number of measures that have been introduced to assist businesses which pay business rates:

  • A business rate holiday for the 2020/2021 tax year for all businesses in the leisure, hospitality and retail sectors (the “BR Holiday”);
  • A cash grant of £10,000 under the Small Business Grant Scheme for businesses who would ordinarily be granted: (1) small business rate relief; or (2) rural rate relief (the “10K Grant”).
  • A cash grant of £25,000 under the Retail and Hospitality Grant Scheme for businesses in the leisure, hospitality and retail sectors with a rateable value of £15-51,000 (the “25K Grant”).

Most of these measures (being the BR Holiday and the 25K Grant) are only available to businesses in the leisure, hospitality and retail sectors. While the 10K Grant seems to be available to businesses in any sector, to qualify, a business would have to be one who would ordinarily be granted: (1) small business rate relief; or (2) rural rate relief. It is therefore unlikely that major financial services companies would qualify for these measures.

Conclusion

While the schemes/measures announced by the UK Government are wide-ranging and should benefit many businesses and employees, they seem to be directed primarily towards smaller to medium size businesses or sectors which have been hit the earliest and hardest by the coronavirus shock (for example, retail and hospitality). Major financial services sector businesses have specifically been made ineligible for some of the schemes and measures. While it is not certain why this is the case, the Government’s view may be based on the thinking that major financial services businesses are expected to have sufficiently robust balance sheets to absorb the effect of the COVID-19 economic crisis in the short term and/or that any major support packages, if required, would have to be considered by the Government on a case-by-case basis. As of now, unlike the 2008 economic crash, the crisis unfolding now does not seem to be one that is in popular view being associated with a deep impact on the financial services sector.

However, as the coronavirus crisis continues to develop at pace, we expect that the Government’s response would also develop to take account of how each and every sector is impacted. The extent of business assistance package remains a fluid piece and we may therefore expect further assistance and clarity from Government in coming days and weeks. This include, for example, further details around CLBILS and whether mid-market financial services businesses would be eligible to access it.

We encourage you to visit our Coronavirus Legal Hub for further up to date insight into the economic aid measures announced so far and the various other issues and challenges which businesses are facing in these unprecedented times.

Financial services businesses should continue to: (a) take internal or ‘self-help’ actions where possible to ensure business is continued as close to normal as possible in these circumstances; (b) make use of the measures announced to the extent available; and (c) monitor the UK Government’s response for future regulatory or financial assistance.