The proposal that has surfaced in the last 24 hours that Coronavirus loans should be converted into a “tax debt” is as interesting for where it has come from as what it offers UK businesses.
Those of a sceptical disposition will, on hearing that it is the UK lending sector that made the proposal will probably nod in that “I told you so” sort of way. Loans which were seen by the banks to be difficult on their part and not particularly commercially attractive are, I believe, seen as becoming even more of a burden when defaults arise, as they inevitably will.
The banks fear that more than ¾ million UK businesses will fail in 2021 with a cost of around 3 million jobs. But that is only the tip of the iceberg. There will be many more business where the loans become “non-performing” and therefore need to be moved out of the network and into the already over-stretched Business Support Units.
The banks believe that the solution is to take the problem away from them entirely. The government would buy the debt off them (at presumably face value) and then administer the repayment themselves. The mechanism for doing so would appear to be to replicate the student loans system on a larger scale with company repayments being based on an ability to pay rather than regular commercial debt repayment terms.
For business owners, the key will be at which point the threshold falls. HMRC has access to a massive amount of information in the form of tax computations which could be used to apply general principals to each business and set the repayment plan. This is more complex than the student loan which uses a set salary level a fair and arbitrary as the basis for repayments starting.
Profit in the previous financial year is an obvious starting point, but that is not a clear indicator of the ability to repay in normal times let alone in the post-COVID world. A formula that uses debt interest cover would be needed to achieve this, and even that wouldn’t be entirely fair.
Additionally, regrettably, the opportunity for manipulation of the results will be exploited by the unscrupulous. If Ferrari sales have risen thanks to Coronavirus loans, there will be plenty of like-minded individuals looking to ensure their results are “appropriate”. The onus on HMRC to police such a system will be considerable.
But, despite these reservations, I see this as a potential positive for businesses. Cash is going to be a scarce resource for the majority in 2021 and probably 2022 and anything which reduces demands on money in that period has to be good. Like the student loans, there is nothing preventing early repayment if businesses are able to, but for the vast majority this will not be an option.
As ever the devil will be in the detail. We need to know much more before we can begin to plan cash flow for the medium term. And, of course, this is a proposal from the banks, not a government initiative. Rishi Sunak appeared to push back from further government intervention earlier this week when he set the bar for further state intervention “very high”. Whether the Chancellor’s policy stance, when we arrive at the early Spring next year and the anticipated “jobs apocalypse”, remains the same remains to be seen.
