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Freshfields Transactions

| 4 minutes read

The taper begins, seat belts fastened and no tantrums please!

For most businesses, the Chancellor’s budget statement yesterday brings some welcome news with the extension of certain critical Covid-19 support measures. However, this is coupled with the removal of certain government-backed loan schemes and a future increase in the corporation tax rate from 19 per cent to 25 per cent from 2023 onwards. These measures seem to indicate the beginning of the end of the extraordinary levels of government support which have been put in place to protect businesses from the immediate impact of the coronavirus crisis, and also reflect the Government’s desire to turn its attention towards fixing the hole in public finances created by the pandemic.

The Chancellor announced yesterday that the loan schemes first introduced in April last year will be switched off for new applicants at the end of March. These will be replaced by a government backed recovery loan scheme where businesses of any size will be able to apply for loans of between £25,000 and £10m through to the end of this year with an 80 per cent government guarantee.

These new recovery loans will be offered in addition to the new restart grants introduced to help businesses reopen and get going again. Non-essential retail premises (which will be the first to open in the Prime Minister’s recovery map) will receive grants of up to £6,000 per premises. Hospitality and leisure businesses, including personal care and gyms (which will open later or be more impacted by restrictions when they do), will be entitled to grants of up to £18,000.

So, we move to the new phase: helpful support continues, but the taper begins…

The withdrawal of some support programmes seemed inevitable and the fact that the initial loan schemes are being replaced with more scaled back versions perhaps demonstrates the Chancellor is conscious of the ‘cliff-edge’ risk of cutting off government support entirely. However, businesses should prepare for the continued wind-down of support as the pandemic – and the government measures required to control it - start to recede.

Prime examples of this “continued support but winding down” are the announcements in respect of the continuation of both the furlough scheme and the current business rates holiday.  

The Chancellor announced yesterday that the furlough scheme, which had been due to end in April, will now extend until June in its current form with the Government paying 80 per cent of workers’ salaries. Thereafter, employers will be asked to contribute 10 per cent from July and 20 per cent from August, with the scheme expected to end altogether by the end of September.

The 100 per cent business rates holiday for all eligible businesses in the retail, hospitality and leisure sectors has been extended through to the end of June, with business rates for the remaining nine months of the fiscal year being discounted by two-thirds up to a value of £2m for closed businesses, with a lower cap for those who have been able to stay open.

It is worth noting of course that a rise in corporation tax does not immediately impact businesses which are currently loss making. In any event, the rate of corporation tax is not set to rise until April 2023, and huge levels of spending are anticipated to continue in the short term to shore up businesses. As a further example of tapering, the 5 per cent reduced rate of VAT relief is set to continue to the end of September (with an increase thereafter to an interim rate of 12.5 per cent up until April 2022 before then going back to the standard 20 per cent rate).

As a consequence of the extensive government support, insolvency rates have been remarkably low since the onset of the pandemic. Restructurings have in large part consisted of “sticking plasters” with a large number of amend and extends of financial liabilities, likely pushing comprehensive restructurings down the road until there is greater clarity on what is happening.

Few companies have yet addressed their balance sheets in any meaningful way, with the consequence being more and more debt building up in beleaguered companies. The “cliff-edge” of government support and reliefs being removed, which were largely previously due to come to an end in March or April, could have led to a wave of insolvencies, but the tapering of support measures and protections should help to soften the landing.

The challenge for the Government will be to adequately wean companies off government lifelines, without triggering a new form of “taper tantrum” (referring to the sharp reaction that followed the US Federal Reserve’s 2013 announcement that it was going to start reducing the quantitative easing programme). Support and legislative reliefs will need to be withdrawn thoughtfully and incrementally.  

Businesses with the ongoing support of stable parent groups or financial sponsors are likely to fair better in the near term than those who may struggle for access to funding. For all overleveraged companies, there will come a point where there is a need to reckon with the full extent of the damage caused to balance sheets by the pandemic. The reintroduction of business rates sooner than many had anticipated may bring that reckoning forward for many businesses in the retail and hospitality sector. 

While the situation currently looks stable and the Government is sensibly targeting a gradual glide path, it will be challenging to achieve an entirely smooth descent. Hopefully there won’t be the equivalent of the sudden 2013 taper tantrum, but we could be in for some turbulence as the shape of the recovery emerges through 2021 and into early 2022.

The “cliff-edge” of government support and reliefs being removed, which were largely previously due to come to an end in March or April, could have led to a wave of insolvencies, but the tapering of support measures and protections should help to soften the landing.


restructuring and insolvency, europe