1. Legislative changes: are there any additional processes or support which have been introduced as a response to the pandemic which I may not have considered previously?
A number of measures have been implemented to help businesses and directors navigate the current crisis, and are largely summarised above. Most notably, from an operational perspective:
- Increasing the minimum net amount of unpaid rent required before landlords can exercise their rights under CRAR.
- Reforms to the UK’s Insolvency Framework under the Corporate Insolvency and Governance Act 2020, including:
- preventing any statutory demands made against companies in the period between 1 March 2020 and 31 March 2021 from being used as the basis of a winding-up petition on or after 27 April 2020; and
- Preventing the presentation of winding-up petitions during the period between 27 April 2020 and 31 March 2021 unless the creditor has reasonable grounds for believing that either COVID-19 has not had a financial effect on the debtor company, or the company would have been unable to pay its debts regardless of COVID-19.
- Temporary changes to wrongful trading rules (in respect of actions taken between 1 March 2020 and 30 September 2020). A second suspension on wrongful trading was announced on 26 November 2020 and applies for the period between 26 November 2020 and 30 April 2021.
- The introduction of a 20-business day moratorium (capable of being extended) independent from any formal insolvency process to allow viable but financially distressed companies to engage with creditors and discuss rescue options without the concern of enforcement action.
- The introduction of a new standalone restructuring plan process which may be used by solvent or insolvent companies. This new procedure will be an additional tool for struggling companies to use. While it is similar to a scheme of arrangement, the key feature of the new restructuring plan, not available in a scheme of arrangement, is a cross-class cram-down provision allowing a company to bind dissenting creditors and shareholders to the plan, if certain conditions are met.
- The protection of supplies to enable companies in an insolvency process to continue buying supplies while attempting a rescue.
These measures are intended to provide businesses with much-needed breathing space. For more details, see our article here.
2. Is there anything else I should look out for?
The Corporate Insolvency and Governance Act 2020 contains wide-ranging regulation-making powers to allow further changes to be made quickly to the UK insolvency framework if it becomes necessary to do so. We’ll continue to monitor for any further changes.
3. What is the position with respect to the applicability of emergency tax measures, including:
a. what they are and apply to;
b. when they are expected to be phased out on or following a return to business; and
c. whether any transitional periods are likely to apply.
The following summarises the position in respect of tax measures only, but note that there are other financial measures, some of which are administered by the UK tax authority (HMRC).
VAT payment deferrals
- The following VAT payments have been automatically deferred to 31 March 2021 without interest or penalties:
No suggestion or announcement has been made that these VAT payment deferrals will apply beyond this period, but it could be extended.
- quarterly and monthly VAT return payments for the periods ending in February, March and April;
- payments on account due between 20 March 2020 and 30 June 2020; and
- annual accounting advance payments due between 20 March 2020 and 30 June 2020.
Income tax payment deferral
- Income tax “payments on account” due on 31 July 2020 have been automatically deferred to 31 January 2021 without interest or penalties.
- No suggestion or announcement has been made that this deferral will apply beyond this period, but it could be extended.
Customs and excise duty deferral
- Duty deferment account holders are ordinarily permitted to defer payment of their liabilities. For such account holders, customs and import duties are payable on the 15th of the following month, and excise duty is due on the 28th of every month. On 10 April 2020, HMRC announced that duty deferment account holders could apply to be approved to pay their customs and import duty liabilities due on 15 April over an extended period without having their guarantee called on or their deferment account suspended. On 5 May, HMRC stated that the same arrangements would apply for the payment due on 15 May. The position for the payment due on 15 June will be determined closer to that date. Excise duties are dealt with separately. Businesses unable to pay deferred excise liabilities must discuss time-to-pay arrangements by contacting the COVID-19 helpline on 0800 024 1222.
- Duty deferment account holders are advised to review their financial position and have all relevant information and documents on hand in the event of another announcement.
- Businesses affected by COVID-19 and facing difficulties in paying their taxes (e.g. employers’ PAYE, corporation tax, VAT) can contact the COVID-19 helpline on 0800 024 1222 to negotiate time to pay their liabilities. We have been informed by HMRC staff that they are permitted to grant deferrals of payments of all other taxes generally on a “no quibble” basis up to 30 June 2020 and interest-free. We have also received advice that customers should call again before that date to provide an update and, if necessary, discuss further time to pay arrangements.
- The time-to-pay service has always been available. However, HMRC’s recent approach allowing longer periods of time to pay and without the imposition of interest is directly in response to COVID-19, and will not be available forever otherwise. Businesses are recommended to negotiate time to pay on favourable terms to assist with cashflow.
Temporary customs and import duty and import VAT relief on medical supplies, equipment and protective garments
- Relief from customs duties and import VAT is currently available until 31 July 2020, for specified state organisations and bodies regarding medical supplies (PPE, medical devices and equipment). The relief is available where the medical supplies are donated or sold to the NHS, or made available free of charge to charitable organisations.
- Relief is currently available until 31 July, but could be extended.
Temporary VAT zero-rate on medical supplies
- A temporary VAT zero-rate applies to the sale of medical supplies made between 1 May to 31 July 2020. Medical supplies include PPE as recommended by Public Health England on 24 April 2020, for use for protection from COVID-19.
- Temporary zero-rating applies until 31 July 2020, but could be extended, particularly if recommended by the government for use when travelling in public.
Business rates reliefs
- Eligible businesses in England, Wales and Scotland that fall within specified sectors (retail, hospitality, leisure and nursery businesses) will automatically receive a business rates holiday for the 2020-21 tax year. This should be applied to their council tax bill issued in April 2020 (or will be reissued). Northern Ireland business rate payers will receive a three-month rates holiday. Their next rates bill will be issued in June 2020.
- It is conceivable that Northern Ireland business rate payers could receive a further rates holiday.
4. Are there specific steps that businesses should take to prepare for these tax measures being phased out – for example new timing of
- payment obligations (and therefore likely pressure on cash flow); and/or
- filing of returns?
As noted in the section above, the government has not announced any phasing out or transitional period for emergency tax measures. Except as expressly permitted publicly or in relation to a personal time to pay concession, as discussed above, businesses must therefore be ready to meet their tax liabilities when they fall due, despite the uncertain economic outlook. Where in doubt, businesses may wish to secure finance and/or approach HMRC to renegotiate payment of their liabilities on sustainable payment terms.
HMRC has not made any announcement to the effect of a blanket extension for the filing of any returns. Penalties can therefore apply on any late returns. However, a statutory defence of “reasonable excuse” may be available. HMRC will consider whether the excuse is reasonable in the context of the delay. We expect that HMRC will take a light-touch approach for delays alleged to relate to COVID-19, given that many businesses will be subject to office closures, reduced or furloughed staff, and difficulties in meeting their day-to-day obligations. However, it would be prudent for business to properly and contemporaneously document their particular circumstances in the event that they are unable to meet the filing obligations to demonstrate why a penalty should not be applied – but contacting HMRC proactively to obtain their agreement is always best.
13th Directive (claim for VAT repayments)
The government has not yet announced an extension of the filing of 13th Directive claims for the period 1 January 2019 to 31 December 2019 (currently due on 30 June 2020). Many Member States have, however, announced an extension from 30 June 2020 to 30 September 2020 in recognition of COVID-19 interruptions. We expect that an extension will be granted. However, businesses are advised to be prepared to submit a claim based on the information and documents they currently have, an explanation why substantiating documents have not been provided, and a commitment to provide such documents as soon as possible. Obtaining the necessary certificate of status is expected to be delayed in certain jurisdictions, where a wet signature is needed.
5. Should the impact of emergency tax measures be reconsidered by businesses – e.g. are there certain legal transactions (such as sales or reorganisations) that parties should preferably postpone or accelerate?
The emergency tax measures set out in sections 3 and 4 above should not require businesses to enter into a transaction or restructuring to obtain their benefit. However, businesses could consider the following:
- VAT, cashflow: businesses may obtain a cashflow advantage by delaying VAT payments to HMRC. HMRC has permitted businesses delaying VAT payments with respect to specified periods (see section 3 above). No mention has yet been made by the government of a further deferral on VAT payments, but this is a possibility.
- Preserving tax losses: for a UK company to preserve its carried-forward tax losses, it is essential that the company should not have ceased its trade or business (notwithstanding that, due to COVID-19, it may be having a temporary break in its activities), and when considering this point, HMRC guidance states that key factors are the length of the break, and the intention of the business proprietors. To help demonstrate that the company has not ceased its trade or business (and thereby preserve the tax losses), the board should clearly document that any break in activities is a temporary measure related to COVID-19, and that the intention of the board is to resume the company’s trade or business, as soon as reasonably practicable. Reaching out to customers in the interim would also help demonstrate that the company’s intention is to resume trading or carrying on its business as soon as practicable.
6. Are there any additional measures proposed, in particular any that are targeted at particular sectors (e.g. aviation)?
In addition to the emergency tax measures detailed above, the government has proposed the following measures targeted certain sectors :
Media, sport and entertainment: The introduction of VAT zero-rating for supplies of certain e-publications will be brought forward to 1 May 2020 (from 1 December 2020), intended to be a boost to readers and publishers during the COVID-19 outbreak
Life sciences: From 1 May 2020, personal protective equipment (PPE) purchased by care homes, businesses, charities and individuals to protect against COVID-19 will be VAT-free for a three-month period.
Retail, hospitality and leisure: Certain properties in the retail, hospitality and leisure sectors (e.g. shops, cafes, restaurants, hotels, cinemas and leisure centres) will not be required to pay business rates for the 2020-21 tax year. Nurseries in England will not have to pay business rates for the 2020-2021 tax year.
7. Are there any sectors or interest groups that are now putting forward, or may in the near future request, special tax measures?
Across industries and sectors, business groups have called for as much financial support from the government as possible. To date, in a tax context, this has generally taken the form of a straightforward request for additional or extended tax payment holidays and deferrals.
That said, representatives of the hospitality sector, one of those likely to be hardest-hit and for the longest period, have appealed for the government’s business rates relief to be extended to all businesses across their industry, as well as for extended time for payment of VAT and payroll tax liabilities).
There have also been suggestions that the government should consider reducing the overall rate of VAT, an approach that certain industry bodies consider worked well when it was adopted in connection with the financial crash a decade or so ago. Brewers have called for deferment of beer duty payments.
Airline organisations have lobbied governments worldwide for payroll tax rebates, extension of tax payment terms and temporary waivers of air passenger duties.
In the real estate sector, there have been proposals to bring in a stamp duty holiday, and to eliminate the surcharges that can apply to the purchase of properties by landlords. This is all with a view to stimulating the property market, particularly in the residential rental markets (given there will likely be an increase in tenant demand, as fewer people are able to afford to buy their own homes as a result of job losses).
8. Which taxes might be increased to address the financial burden caused by the crisis, for example,
- are there political commitments or policy trends that might indicate the likely focus of any tax increase in the future (e.g. to maintain low corporation tax, but to increases taxes on personal wealth)
- measures to broaden the tax base, such as digital services taxation and a pre-emptive response to the OECD/ G20 Inclusive Framework on BEPS (“BEPS 2.0”)
The government has not announced any plans for how tax revenues will be raised in future as a result of COVID-19 (to fund governmental support measures and/or to recoup falling tax revenues from the lockdown).
The decision whether to introduce tax hikes and austerity measures will depend on how quickly the economy recovers after the lockdown ends, and some sort of normal business trading resumes. The government may want to wait and see, as it will not want any action on tax increases to stunt the return to relative business normality.
The manifesto of the Conservative party (who hold a majority in government) pledged not to raise the rates of income tax, national insurance contributions (NICs) or VAT. However, this was before the COVID-19 crisis. Indeed, the chancellor has already warned that the price of government support for self-employed taxpayers must mean higher taxes on them to create a level playing field with employees. This would be expected to come in the form of higher NICs. It is possible the government could go further and increase tax on owner-managers (e.g. increasing the rate of income tax paid on dividends, or a introducing an NIC charge on dividends in lieu of salary).
What seems likely is that any revenue raising reforms that were in the pipeline before the COVID-19 crisis will go ahead (e.g. extra 2% stamp duty land tax (SDLT) surcharge on residential property in England and Northern Ireland for non-residents from 1 April 2021, and the new plastic packaging taxes from 1 April 2022), or even be increased.
Possible areas of increased tax (which would not conflict with the Conservative party pledge above) could be:
- environmental (“green”) taxes: especially given that the lockdown has brought a renewed focus on the environment (due to falling pollution in cities);
- capital wealth taxes: the UK currently taxes income (as opposed to capital) much more heavily, so this might be rebalanced by reforms such as higher capital gains tax rates, reduced inheritance tax reliefs, or limits to relief for pensions contributions by higher-rate taxpayers;
- UK corporation tax rate hike (currently 19%): this is already one of the lowest in the EU, so there is room for it to be increased while still remaining competitive (and even more so if other countries raise their rates); the government has already showed a willingness to do this, by reversing the scheduled drop to 17%; and
- imposing SDLT on purchases of shares in UK land-rich companies: currently such purchases attract stamp duty at a rate of 0.5% of the purchase price; SDLT rates are much higher and such a move would be in keeping with other tax policy changes recently introduced.
Turning to indirect tax, consumer spending has dropped significantly, giving rise to large reductions in VAT, fuel and excise duties for the government during the COVID-19 crisis. Added to that, much of the spending has been on food and health products which do not carry a VAT charge. Consumer spending will pick up, as lockdown ends, but the government may look at increasing the rate of VAT from 20% to 21% or 22%, given that the rate has not increased for many years and the UK has a relatively low VAT rate compared to other EU jurisdictions. That said, the hospitality sector will be calling for reductions to stimulate customer demand.
The UK has already implemented a digital services tax (DST), which took effect on 6 April 2020. The DST is effectively a pre-emptive response to Pillar One of BEPS 2.0 (which in simple terms would raise taxes by widening the concept of permanent establishment to capture businesses with no physical presence in a country), but the government has stated it remains committed to a multilateral solution to the challenges digitalisation has created for the corporate tax system and will repeal the DST when an appropriate global solution is in place.
The government has not announced any plans to adopt any pre-emptive response to Pillar Two of BEPS 2.0.
9. Are there other actions that ought to be considered by businesses in your country e.g.
- revisit past tax filings to claim carry back of losses;
- revise or update preliminary tax assessments;
- claim bad debt relief for VAT output tax
There are some simple yet potentially effective actions that businesses can implement to assist with their cashflow or overall tax position:
- Revisiting past tax filings to claim carry-back losses: the UK rules permit a company to carry back trading losses. Where the company has not ceased trading, losses can be carried back to be offset against profits of any description for the 12-month period immediately preceding the period of loss (provided the company was carrying on the trade within the charge to corporation tax in the prior accounting period). If it has ceased trading, the carry-back period is extended to three years. There are certain restrictions. A claim for carry-back relief must be made within two years of the end of the loss-making accounting period or any further period that HMRC allows.
- Recomputing gains to take account of contingent liabilities: the UK rules broadly require capital gains to be computed in the first instance without regard to contingent liabilities, but if those contingencies do become enforceable, it is possible to retrospectively compute the gain, and if necessary reclaim any tax paid.
- Adjusting corporation tax instalments: large companies are required to pay corporation tax in quarterly instalments based on estimated profits. If profits are expected to be smaller due to COVID-19, these should be adjusted accordingly to avoid overpaying.
- VAT Bad Debt Relief (BDR): if a debt is written off, BDR allows businesses to recover the output VAT accounted to HMRC in respect of supplies. BDR can be claimed where:
- VAT on the supplies has already been accounted for and paid to HMRC;
- the bad debt has been written off in the company’s VAT accounts and transferred to a separate bad debt account;
- the value of the supply is not more than the customary sale price;
- the debt has not been paid, sold, or factored under legal assignment; and
- the debt has remained unpaid for six months after the later of the time payment was due and payable, and the date of the supply.
10. Do you need to consider in terms of your funding requirements for returning to business
If your business has temporarily closed, there will in a number of cases be a delay between the incurrence of costs to restart your business and the consequent receipt of income. Consider how you will finance that gap. In particular, if you have any remaining availability under any revolving credit facility, note that there will likely be a drawstop on new funding if a Default (or occasionally Event of Default) is continuing.
11. How will funding a return to business, including taking on additional indebtedness, impact on your financial or other covenants?
If your business has temporarily closed, consider how to approach the effect this will have on the ability of your business to comply with any maintenance financial covenants. In a number of cases, lenders were receptive to a covenant waiver for the March testing date. Consider whether a wavier, or indeed full covenant reset, will be needed for future test dates (and then also consider when would be an appropriate time to try to determine what those reset covenants should be). Particular considerations include:
- (of course) the decrease in revenue/EBITDA over the lockdown period;
- any likely tapered increase in revenue/EBITDA as lockdown restrictions are relaxed;
- costs for restarting the business;
- payment of any deferred payments (i.e. rental payments, business rates, HMRC payments); and
- incurrence of any additional indebtedness including under any of the UK government schemes.
Given the negative impact the current circumstances may have on the financial condition of certain businesses, if the margin you pay is subject to a ratchet, it will likely increase if your business’s financial condition deteriorates (e.g. as leverage increases). Further, if a ratchet applies, the margin will usually be set at the highest level if an “event of default” is continuing.
12. Are there any remedies such as equity cure that you should be checking to provide liquidity to prevent a default or improve your financial position?
In some circumstances, it may not be possible to agree a waiver or amendment to your maintenance financial covenants, so it may be prudent now to review any equity cure rights in your credit agreement.
If you have a net leverage maintenance financial covenant, it might be beneficial to contribute additional shareholder capital ahead of the next testing date, as such additional cash in the business (as at the testing date) will usually be taken into account (sometimes as a "pre-cure") when determining net debt for the purpose of testing net leverage.
13. What do you need to consider in relation to audit requirements?
Audit requirements: practicalities
Consider the deadlines to deliver to your lenders your audited financial statements and the practicalities of your auditors being able to carry out their audit. Will there be sufficient time and access to allow the auditors to gather sufficient, appropriate evidence and finalise their report before the deadline?
Audit qualification “event of default”
A number of credit agreements will include an “event of default” that will arise if the auditors qualify their report in respect of your annual financial statements. Consider in particular the auditor's assessment of going concern, in the context of both increased economic uncertainty and the ability of your business to comply with any maintenance financial covenants.
14. What is the process if I need any amendments made or waivers given under my loan documentation (including in respect of financial covenants)?
You must consider what proportion of your lenders need to consent to the requested amendment or waiver. Amendments to financial covenants generally require consent of majority lenders (typically 66.6%) and, on SSRCF/unitranche or FOLO deals, in addition, the consent of majority super senior lenders to the extent the amendment relates to the super senior covenant.
As a practical point, in our experience, lenders tend to be more receptive to requests for amendments and waivers if a borrower presents to them well-thought-out and reasoned plans to address any issues in the business, supported by appropriate evidence/forecasts.
15. Dealing with creditors, including amendments and waivers – Bonds
a. If I can’t comply with the terms of my bond covenants who do I need to notify?
If a default has occurred or is likely to occur, communication with bondholders will often be required through a combination of:
- public announcements filed on the exchange where the bonds are listed and the issuer's website; and
- simultaneous notice to the trustee or fiscal agent (as determined by the governing document of the bonds).
Most high-yield eurobonds do not have financial covenants, material adverse effect defaults or cross-defaults to other indebtedness (in the latter case, unless and until there has been an acceleration of the other indebtedness above a threshold amount). Investment grade bonds, and other bonds that are not high-yield bonds, may include material-adverse-effect, change-of-control and cross-default provisions.
Key default concerns in the near term for bonds, whether they are investment grade, high-yield or other bonds which are not high-yield bonds, are likely to be:
- inability to file necessary reports (which may include accounting certifications which may not be made);
- failure to report timely any material developments (if the bond documentation requires such reporting); and
- inability to pay interest or principal.
b. If I need to ask for a waiver or amendment to the terms of bonds issued by my business what steps do I need to take?
Governing documents for bonds will usually have a detailed waiver and amendment procedure spelled out. It should be expected that consent from bondholders representing a majority of principal amount outstanding will be required for amendments to non-economic terms (such as ability to incur additional debt), but that economic terms (e.g. maturity, interest rate, interest payment dates, currency) will require 90% to 100%, depending on bond documentation. Changes to collateral security arrangements may also require super majority consent. The relevant thresholds for bondholder consent will be contained in the trust deed or the indenture of the bonds.
As a matter of first instance, an issuer should have counsel review the amendments and waivers section of the bond documentation, as well as to seek advice of counsel regarding prudent public communications under applicable securities laws and regulations.
c. What is the process for contacting bondholders and holding meetings to agree changes in the terms of my bond documents?
Bonds are held in electronic form via the clearing systems and usually through a custodian who holds the beneficial interest for these bonds on behalf of the end investors. The bonds are also freely traded in the OTC market. As such, issuers of listed and cleared eurobonds do not generally know who their holders are. To obtain bondholder consent to an amendment, a consent solicitation process will be required. An issuer will typically enlist the aid of a financial advisor and information agent to run a disciplined written consent process via the Trustee or Fiscal Agent.
Bondholder meetings, if required, will be governed by a combination of the bonds' governing documents, the rules of the relevant clearing systems and local statutory provisions.
16. Is the availability of any return to business funding or relief either (a) conditioned on the use of proceeds for green or social purposes or (b) linked to sustainability-related outcomes? If so, what are the applicable purposes or outcomes?
There are no such conditions in the Covid Corporate Financing Facility, the Coronavirus Large Business Interruption Loan Scheme (CLBILS), or the Coronavirus Business Interruption Loan Scheme (CBILS)