When the government was giving out Coronavirus business support in 2020 like free sweets in Santa’s Grotto – most businesses were both grateful and relieved. Few will have given much thought to the future at a time of such crisis and deep uncertainty…
The scale of the handouts was astounding. The various government guaranteed loans schemes disbursed a total of £76bn, of which the lions share was 1.5m Bounce Back Loans (BBLs) amounting to £47bn. The furlough scheme cost £66bn and supported 11.6m jobs.
Bounce Back Loan repayment
Now some important deadlines to consider. The initial interest and capital repayment holiday for Bounce Back Loan repayment ends a year after the loan was made and the last advances were made in March 2021, so by March 2022 all borrowers should be making repayments out of cash flows still stretched by the ongoing impact of the pandemic.
Cash flow pressures
If the only thing that businesses had to worry about was loan repayments, dealing with the issue would be relatively straightforward. The government varied the scheme to allow ‘Pay As You Grow’ arrangements to link repayments more closely to progress being made post-pandemic. According to a National Audit Office (NAO) report in November 2021, 21% of borrowers had taken up this option. The maximum period for loans was also extended from six years to ten.
Sadly, a Bounce Back Loan repayment is unlikely to be the only debt burden faced by businesses. Other pandemic legacy debts have built up while landlords have been prohibited from enforcing rent arrears; HMRC deferred some historic tax liabilities and deliberately relaxed its collection procedures for ongoing taxes. Other creditors lost their most powerful collection weapon from March 2020 until the end of September 2021, when the use of Winding Up Petitions was banned.
It is too early to be sure how many BBL borrowers are struggling to pay back the loans, but by the end of September 2021 £1.3bn worth of BBLs had already defaulted. What is equally uncertain is how the actual lenders will approach the recovery of the loans, where repayments fall into arrears.
Superficially, they are under no obvious pressure to enforce because they have a 100% guarantee from the government. However, those guarantees are conditional on them making reasonable efforts to recover the loans before they can claim under the guarantee which may force them to be hard-nosed with borrowers. Interestingly, the government has only paid out £19m so far under its guarantees.
Fraud on Bounce Back Loans and the Furlough scheme
The speed with which the support schemes were launched and the lack of due diligence necessitated by the desperate need to cash quickly into the hands of struggling businesses turned the situation into a fraudster’s paradise.
An initial estimate from the Business Department (BEIS) suggested that 11% of BBLs totalling £4.9bn were fraudulently obtained, though a more recent assessment has reduced this to 7.5%. HMRC reported in November 2021 that 8.7% or £5.5bn of furlough scheme monies were claimed fraudulently or in error.
Both BEIS and HMRC have swung into action to recover as much of this money as possible. BEIS has set a budget of £32m for its recovery programme, while HMRC had already opened almost 23,000 investigations into furlough fraud by the beginning of November 2021. It has a pot of £100m from the Treasury to fund an investigation task force of 1,250 and the associated costs.
What should businesses do now? -Bounce Back Loan repayment
If cash flow is a problem, the first step is to talk to the lender to negotiate less onerous terms by taking advantage of the Pay As You Grow (PAYG) options made available to them by their lender. Under PAYG, borrowers can reduce their repayments to an interest only basis for a period of up to six months and they can use this arrangement up to three times during the term of the loan. Additionally, borrowers can take a complete repayment holiday of up to six months, but only once during the term of the loan.
If repaying the loan is unachievable, never mind all the other accumulated liabilities, the responsible action is to take expert advice about restructuring options to preserve as much of the business and as many jobs as possible. Possible steps might be a Company Voluntary Arrangement (CVA) or Administration.
Fraud allegations
If you believe your business has taken out a BBL or accepted furlough cash outside the scheme rules, keeping quiet in the hope of avoiding detection is a deeply dangerous strategy. The NAO may have expressed their doubts about the ability of BEIS to chase down BBL frauds, but HMRC are very definitely on the case. Admitting the error and engaging in constructive dialogue about repaying the funds will mitigate any punishment.
Equally, if the BBL lender or HMRC have issued notification that they are investigating suspected fraud or mis-claiming, ignoring the problem will not make it go away. A significant element of investigations is being prompted by whistle blower tip offs, so the information that BBL and HMRC have may not be accurate and the allegations may be spurious. Resisting the recovery action could well be possible.
Get expert advice and get it early
Very few management teams have the time or right resource to deal with these situations alone, especially in these deeply stressful times. Whether it is negotiations with a lender, assessing restructuring options or disproving fraud allegations, experience matters. Putting together the requisite information, planning and implementing strategies and securing a successful outcome is best done through teamwork between management and outside experts.
Forensic knowledge and techniques will play a particularly important role, as will effective negotiations with HMRC, which are firmly rooted in reality. Independent advisers need to be involved right from the outset, as soon as the potential or actual problem is identified.
If you are affected by any of these issues, Opus is here to help. Please contact our Partner Adrian Dante at our Maidstone Office . Opus ethos has always been to engage with those facing difficulties with a constructive and positive attitude.