Coronavirus Job Retention Scheme is coming to an end
From Monday the furlough scheme enters the next phase of its wind down as businesses are asked to increase the amount they contribute to the wages of furloughed workers. With warnings echoing from all sides, the Government appears to be determined to stick to the current end date of October. With businesses of all sizes struggling with cashflow, many will be wondering how they can ensure business continuity.
Winding down furlough
Back in My Sunak set out a timetable for the winding down of the furlough scheme.
Already, we’ve seen the introduction of flexible furlough in which employers can bring people back to work part time, with the Government covering the rest of their furloughed wage. National Insurance contributions and auto enrolment obligations have been back since the beginning of August.
From this month, the Government will only pay 70% of furloughed workers’ wages up to a cap of £2187.50. As an employer, you’ll have to find the additional 10% along with employer NIC and auto enrolment contributions.
From October, the Government’s contribution will fall to 60% to a cap of £1,875.00 which means you’ll have to find the additional 20% to make up the 80% along with NIC and auto enrolment contributions.
After October, the scheme ends completely. However, the Chancellor did offer the prospect of a job retention bonus of £1,000 for every employee which is not made redundant until the end of January 2021.
The end of furlough could be devastating. In May, a survey from the Institute of Directors suggested that a quarter of all the firms using the furlough scheme would not be able to top up staff wages.
Other experts have warned of a surge of insolvencies when the furlough scheme ends. Whether that will come immediately or over the course of several months remains to be seen, but the harsh reality is that the furlough scheme simply meant pain delayed rather than averted.
Throughout the course of lockdown, businesses of all kinds have seen their capital reserves dwindle. Many firms operating in badly affected industries will still see little or no business when the furlough scheme ends while others face a long journey until business returns to the pre COVID 19 levels.
Opposition parties and business groups have been vocal in their criticisms of the move. Labour has called on the Government to extend the furlough scheme for the hardest hit industries. The Resolution Foundation echoed this claim stating that, as of the beginning of August, only half of those employees who had been furloughed had returned to work.
What to do?
So, if your business is struggling to pay your staff after furlough, what options do you have? You may look to commercial funding to try and cover the gap. However, this will add to your debt and should only be used if you are genuinely confident of your business returning to pre COVID 19 levels within a relatively short space of time.
If that’s the case, it could alleviate some of the immediate pressures and make it possible to retain your staff. Keeping hold of valuable employees in who you have invested time and money in will also put your business in a better position to thrive once business returns to normal.
However, this will prove to be expensive, difficult to secure approval and can push your business further into the red. It can be cheaper and more sustainable to investigate other Government support options such as the bounce back loans, which is aimed at small and medium sized enterprises. This allows you to borrow anything between £2,000 and up to a maximum of 25% of your turnover. The maximum loan amount is £50,000.
This can be used to fund working capital and get you over this gap. Although it is debt, it is entirely interest free for the 12 months, so if you are able to pay it back quickly, you’ll have no interest to pay. After that first year, you’ll still only be paying a low interest rate of 2.5% a year, so it is an inexpensive form of capital.
For some, though, there will be no option other than to make staff redundant. If that happens, you’ll have to make sure you can fulfil your legal obligations. All staff made redundant who have more than two years’ continuous service under their belts will be entitled to redundancy pay, based on their full salaries, not the amount they received under furlough.
You will also have to plan the process carefully to avoid any claims of unfair dismissal. If successful, a claimant could be entitled to up to 52 weeks’ worth of pay up to a statutory cap. Even if they are unsuccessful, this could take considerable resources to defend. As such, you should ensure you go follow all appropriate consultation periods and obligations before deciding on redundancies.
Get a hold of your finances
However, there may still be a glimmer of hope. The Government has made a series of U turns during this pandemic. From the exam results to the eviction ban, Number 10 has often abandoned policies at the last minute.
Germany, France and other major countries have already committed to extending the scheme into 2021 and beyond which increases the pressure on the Government to follow suit. All statements point to the contrary, but it would be perfectly in keeping with policy making so far for Whitehall to change course at the last minute.
However, that’s something no business should rely on. Indeed, whether it’s in October or later, the furlough scheme will have to come to an end. It is estimated to have cost the Government £1.4bn every month and the Treasury currently feels public finances will not support a continuation.
When it does end, businesses will have to grapple with an economic environment unlike anything seen in living memory. Already, the UK is experiencing what the ONS describes as the ‘largest recession on record’.
Difficult decisions will have to be taken. To make them, businesses will need a firm understanding of their finances. They will have to see what’s coming in, what’s going out and draw up the most accurate and detailed projections possible. Here are just some of the questions you’ll be wrestling with:
- If you’re planning to take on debt, how certain can you be about the speed with which business will return to normal?
- Can you afford to keep staff on?
- If you make redundancies, will they affect the long-term competitiveness of your company?
- Where in your business can you afford to make the biggest cuts?
Finding the answers to these questions will be vital but extremely challenging. The better the financial information you have at your finger tips, the easier it will be for you to get those questions right.