There are only two ways your accountancy practice can come out of the current coronavirus crisis:
One: Limping along for years as you struggle to bring it back up to the level it was at before the UK Government began forcefully closing down businesses.
Two: Or you could recognise urgent changes required in your business and come out of the crisis stronger than ever. It is in times of greatest trial when business owners become most resourceful, change the way they were operating before, and come out with an entirely different — and far more successful — way of doing business.
The Chancellor of the Exchequer’s financial aid announcement (and red flags for business owners)
Chancellor of the Exchequer Rishi Sunak announced a staggering economic scheme called the “Coronavirus Job Retention Scheme” in order to help save jobs.
Some of the key points of his address follow below. We’ve marked RED FLAGS for business owners and sole-traders with a red asterisk (*), and will explain why they’re red flags in the following section.
Here’s a summary of key points of his address:
- The government will help pay people’s wages. Any employer in the country, small or large, charity or NGO can apply for the grant. Government grants will cover 80% of retained workers up to £2,500 per month. This is slightly higher than the median income.
- Workers in any part of the UK can retain their job and secure at least 80% of pay backdated to the 1st of March. (*)
- The scheme will run for 3 months initially, but is open to being extended.
- Government will pay grants to secure as many jobs as necessary. (The Chancellor mentioned that many people had been laid off already.)
- HMRC is working 24/7 to get the scheme up and running.
- The first grants are expected to be paid in weeks.
- The Coronavirus Business Interruption Loan Scheme will be interest-free for 12 months. Loans will be available as of Monday. This is currently available for small- to medium-sized businesses. Other plans are afoot for large businesses. (*)
- The next quarter of VAT has been deferred. No VAT for the following quarter will need to be paid until the end of the financial year. This equals a direct injection of £30 billion into the UK economy, or 1.5 percent of the GDP. (*)
- Business rates abolished altogether for this year for businesses in hospitality, retail and leisure.
- UK Gov will provide cash grants of £25,000 for small business properties.
- Universal credit will be increased by £1,000 per year for the next 12 months.
- Working tax credit basic element will also be increased by £1,000 for the next 12 months.
- The minimum income floor will be suspended so that self-employed people may “access, in full, universal credit at a rate equivalent to statutory sick pay for employees.”
- Self-employed self-assessment payments have been deferred to January 2021. (*)
- Homeowners can “get a 3-month mortgage holiday, if they need it.”
- Local housing allowance will cover 30% of housing rent.
The red flags for a business owner or sole-trader
Watching the Chancellor’s speech, one cannot help gain the impression that he is sincerely trying to do his best for the UK. But whether that’s the case or not, the UK really has no choice right now. Either financial support is injected into the country, or we will enter a period of financial dark ages that has never before occurred in our lifetimes.
For employees, the equation of the announcement is simple: They will receive up to 80 percent of their pay, and they might qualify for other benefits. End of story.
For the business owner, the equation is far more complex. Because the red flags above all relate to the subject of loans.
Think of it this way:
You will not have to pay next quarter’s VAT — but you will have to pay it. This is a loan.
You will not need to pay interest for 12 months on an Interruption Loan — but you will still need to pay back a loan you were not expecting to take out had it not been for coronavirus. And after 12 months, that interest will start needing to be paid. This is a further burden on your business 12 months from now.
Self-assessment tax has been deferred. This is merely another type of loan. It will eventually need to be paid.
If you have employees, they will be paid for up to 80 percent, but you will need to pay them their full wages once the scheme has run its course. It means that you either get your business up and running successfully, quickly, or those employees will need to be laid off eventually.
Yes, the injection by the Exchequer is massive and appreciated — but it will only benefit you if you come out of this stronger than you went into it. In essence, you’ll be in more debt when the 12 months have run their course, or when the end of the year comes and this quarter’s VAT is due.
Don’t consider the injection a handout. Consider it a marketing fund. Consider it nothing more than a breather while you drastically cut costs and increase your client-base.
Yes, the Exchequer’s injection might keep you afloat. But your goal in this current crisis should not be to simply “stay afloat.” It should be to change ship entirely, to find a completely new model for your business, a model which allows you to work remotely, market aggressively, put your name out there and really come out of this crisis swinging.