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The Budget’s Furlough Extension- how much will it really help distressed businesses?

The March 2021 budget saw the much-mooted extension to the furlough scheme confirmed as the Coronavirus Job Retention Scheme (to use its official name) was prolonged until the end of September. Justification for this included the wish to maintain the ‘stellar progress’ in recovery thus far that has seen a ‘swifter and more sustained economic recovery” than expected.

Chancellor Rishi Sunak made it clear he wished to avoid a jobs ‘cliff edge’ and this delay allows for a gradual tail off of furlough. From July, Companies will be asked to contribute increasing amounts toward the furlough payment (10% in July and 20% in August and September); the rationale behind this being that the financial pressures on companies should lessen once all lockdown measures end in June (as currently scheduled) and therefore they should pick up some of the slack. The furlough scheme – which pays 80% of employees’ wages for the hours they cannot work in the pandemic – has been open to abuse and saying for certain that ‘hours cannot be worked’ due to the pandemic is difficult.

Talk about ‘zombie businesses’ abusing the furlough system until its completion before entering insolvency has been widespread. Having companies contribute increasing levels of the support measure should act as a deterrent.

A host of measures to manage the misuse of the coronavirus support measures are being put in place. Since budget day, no further information has been given about the temporary ban on statutory bans and winding up petitions being further extended (beyond the revised 31 March 2021 deadline); not to mention Wrongful Trading sanctions.

It is likely that this, rather than the delaying ending furlough payments, will have a greater bearing on the future for distressed companies.

Should the armistice on winding up petitions not be extended, financially compromised businesses will not be able to further increase creditor balances unchecked without fear of reprisals, all whilst collecting furlough payments for staff and Directors (when applicable). This perfect storm of creditor impotency, heightened government support and a lack of retribution for trading whilst insolvent (with only a brief return of s.214 Wrongful Trading actions before re-suspension) is nearing an end.

Those companies that can be characterised as ‘zombie’ will benefit that little bit less. The furlough will gradually become more expensive. By August, a £2,400 furlough payment to an employee would cost the company £600 (excluding any top up to 100%) per month. If, as expected, the ceasefire on creditor and government action (i.e., the Insolvency Service) concludes, wrongful trading will be dealt with as per the law and those companies on life support will be taken off it.

Fundamentally, the furlough is designed to preserve jobs. This was the idealistic goal that Rishi Sunak launched in April 2020. The economic implications of funding such a substantial support measure is another discussion entirely. However, those businesses trading as best they can, and with the full intention of surviving the pandemic, will appreciate the delay of the measure’s conclusion as they seek to recover and grow; supported by even more revival measures announced in the March 2021 budget.

It is the already non-viable businesses who have the most to lose from the budget’s changes and the removal of other measures in the coming months.

Disclaimer

The information was correct at time of publishing but may now be out of date.

Business Recovery
Posted by Cowgills
17th March, 2021
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