What next for the COVID-19 financial support schemes?

07 May 2021

As lockdown restrictions lift and the UK gradually returns to normality, many businesses will soon face a new challenge – repaying the Government-backed COVID-19 business loans that have helped to keep them afloat in recent months.

Over the past year, various concerns have been raised about how much of the £75 billion lent to businesses through Bounce Back Loans (BBLs), Coronavirus Business Interruption Loans (CBILs), Coronavirus Larger Business Interruption Loans (CLBLs) and the Future Fund, will be repaid. Much has also been speculated about the potential scale of fraudulent claims made through these and other Government support schemes – most notably the Coronavirus Job Retention Scheme (the furlough scheme).

This post looks at the potential scale of losses incurred by the Government’s financial support schemes, the amount of potential losses attributable to fraud, and the role being played by the insolvency profession in tackling this fraud and supporting the repayment of these loans by helping viable businesses to address their financial positions.

Scale of the losses

Through the COVID loans, the Government has provided lenders with a Government-backed guarantee against the outstanding balance of the facility, with lenders initially fronting the cash to struggling businesses. Of the various schemes, BBLs – the loans for small and micro businesses which involved the Government issuing lenders with a full guarantee – have attracted the most concern in relation to repayments.

In October last year, the National Audit Office (NAO) warned that between £15bn and £26bn of the £46.5bn lent to small and micro businesses through BBLs alone may not be repaid. In December, the House of Commons’ Public Accounts Select Committee published a report which suggested that the large amounts of losses from BBLs were due to weaknesses in the scheme’s initial design. It argued that the Government prioritised speed over “protecting the taxpayer”, and was only able to successfully deliver loans to small businesses so quickly by “increasing the level of risk through the lack of credit, application and affordability checks” – with applicants only being required to self-certify the information provided in their application.

The report concluded that this increased the likelihood of fraud, as well as credit losses – “where the borrower wants to repay the loan but cannot”. While it estimated that most of the defaults will be credit losses, it also expressed concerns that the Government lacked the data to properly assess the scale of the potential fraud.

Meanwhile, in September 2020 HMRC estimated that up to £3.5bn may have been lost due to fraud or error related to the furlough scheme. At a Treasury Select Committee session earlier this month, Gareth Davies, Comptroller and Auditor General at the NAO, said that the furlough scheme was particularly vulnerable to three types of abuse: employers misstating the amount paid to employees or the number of staff; employers claiming through the scheme but still requiring their staff to work; and organised criminals coercing employers into making fraudulent claims or setting up false agent arrangements. It is understood that HMRC will not be able to confirm the full extent of the fraud until the end of 2021. However, at the same Treasury Committee session, HMRC Director Andy Morrison admitted that the various extensions of the furlough scheme have enabled fraudsters to increase their understanding of the scheme and adapt their methods accordingly, leading to “greater…opportunities” to abuse the scheme over time.

COVID loan repayments on the horizon

Repayments of BBLs and the other initial COVID loan schemes will begin in May. With concerns mounting that many small and micro businesses may struggle to repay BBLs this soon, the Chancellor established Pay As You Grow – a scheme which enables businesses to delay payments by up to six months and to extend their loan term to 10 years. Business sector representatives have said that this scheme will help to ensure that many companies are able to repay their loans in full, although for some sectors – such as hospitality, leisure and non-essential retail– this may depend on whether lockdown restrictions will be lifted at the end of June, as set out by the Government’s roadmap.

Those directors who have taken out COVID loans for their companies and who are unable to repay will be subject to the usual actions used by creditors to recoup the amounts lent. Indeed, some banks are already beginning to warn customers of impending repayments earlier this month. It has been reported that the Government is expecting banks to be rigorous in their efforts to secure repayments on the schemes, with the NAO’s investigation into BBLs having warned that the Government would have to work with lenders to “implement a robust debt collection plan”.

HMRC’s powers in combatting fraud

The full scale of fraudulent claims has yet to emerge, but arrests have already been made for fraudulent BBL and furlough applications.

Given the significant investment by the Government into these schemes, it is expected that HMRC will act vigorously against all potentially fraudulent applications. In this year’s Budget, the Chancellor announced that a taskforce of 1,265 HMRC staff would be established to combat fraud within all the COVID support packages, and that the Government would “significantly strengthen law enforcement for Bounce Back Loans.”

Meanwhile, the Finance Act 2020 introduced several new powers for HMRC to deal with abuses of the furlough scheme and employer grants. Businesses must notify HMRC of any errors – deliberate or accidental – on their applications within 90 days. After this, they face a penalty of up to 100% of the amount wrongly claimed (clawed back as a tax liability). It is expected that in the most serious cases, a review of the whole business will be undertaken, rather than just that of the claim. Directors of companies unable to pay penalties on incorrect claims can also be held jointly and severally liable. 

The insolvency profession’s role in tackling fraud and supporting business rescue, and R3’s recommendations to Government

HMRC are also clamping down on claims made by companies that are insolvent or where there is a “serious possibility” of insolvency, and are looking to work with insolvency practitioners to maximise recoveries from fraudulent applications.

Insolvency practitioners have significant expertise and wide-ranging powers to investigate and, under civil litigation, to prosecute those involved in or assisting in fraud. When an insolvency practitioner is appointed as an office holder in an insolvency procedure, they will closely scrutinise management decisions which may have led to the financial distress of the company. They can also bring financial claims against directors, for example, for breach of fiduciary duty, insolvency law or company law.

Insolvency practitioners are also expected to report cases where it appears that a company has applied fraudulently for a Government-backed business loan scheme, or the furlough scheme, to the Insolvency Service.

Meanwhile, businesses that are genuinely unable to pay back loans may need to enter into restructuring or insolvency processes, with the insolvency and restructuring profession having a vital role to play in supporting the rescue of businesses that would have been viable were it not for COVID. Although the number of businesses who face insolvency as a result of the pandemic will become clearer when the temporary COVID support measures come to an end, insolvency numbers have started to rise.

In R3’s Budget submission earlier this year, we recommended steps the Government could take to mitigate a potential cliff edge of insolvencies of viable businesses. One of these steps was for the Government adopt a policy across all departments to support restructuring proposals where a business was viable pre-COVID-19 – and would still be viable, were it not for the pandemic. Support for viable restructuring proposals would provide those businesses with time to deal with accrued pandemic liabilities and pay back the relevant support scheme loans, thus avoiding a formal insolvency process and a potentially more severe outcome for employees and creditors including, crucially, the Exchequer.

Looking ahead

The coming months are likely to be uncertain ones for businesses across the country, as the Government gradually tapers down state support. The initial COVID loan schemes have already closed, although they have been replaced by a successor – the Recovery Loan Scheme. Meanwhile, the Government will reduce the amount it contributes to the furlough scheme from July, ahead of the scheme closing in September. Although the full picture of losses resulting from these schemes is still unclear, the insolvency profession’s role in rescuing viable businesses, and tackling fraud is likely to be crucial in helping to prevent further losses to the public purse.