Businesses face £50 billion 'bombshell' in April as coronavirus support packages end, says Labour

Labour is today warning that businesses face a bombshell in April of more than £50 billion which will cost jobs and blow a massive hole in the recovery, as rates holidays, tax deferrals, VAT cuts, the furlough scheme and other government support packages are due to end.

Businesses can’t wait for the Budget for the Chancellor to act. With an estimated 1 million food and accommodation services businesses reporting cash reserves of less than three months, the Party is calling for the Government to immediately announce an extension to the furlough scheme, extend for at least six months the 100% business rates relief for retail, hospitality and leisure businesses, and continue the temporary 5% reduced rate of VAT for the hospitality, tourism and culture sectors.

Labour argues that economic support has failed to keep pace with necessary public health restrictions that have shut down large parts of the economy. Many businesses are now expecting to be closed in April and beyond, with lost trade into the summer.

Using government data, the Party estimates that the extra cost of this bombshell facing firms amounts to more than £50 billion, including:

• £34 billion in VAT deferrals affecting over a quarter of businesses (26% or 600,000 firms)
• £9.6 billion in business rate payments for 2021-22 that high street firms will be liable for when the business rate holiday ends
• £3.3 billion monthly support through the Coronavirus Job Retention scheme

Alongside these costs, firms will have to begin to pay back coronavirus support measures including:

• An estimated £275 million of interest payments on bounce back loans, and CBILs loans, after the Government stops paying the first year of interest for firms
• Loan repayments on the £62 billion in bounce back loans, and CBILs loans taken out by companies since the start of the pandemic
• £4.1 billion cost of the hike in VAT to 20% (from 5%) for the hospitality sector, accommodation and attractions
• Businesses will also have to account for the £9 billion hole from the Job Retention Bonus caused in their finances after the Chancellor scrapped it

Lucy Powell MP, Labour’s Shadow Business and Consumers Minister, said:

“The Government's failure to ensure economic support is adequate and goes hand in hand with public health measures has meant we’ve seen the worst recession of any major economy and the worst growth.

“The £50 billion business bombshell firms face must be defused before it blows a hole in our economy. We need a smarter furlough scheme, and better support for businesses, to secure jobs and get Britain on the road to recovery.”

Ends

Notes to editors

Cliff edges in coronavirus support and what they mean in cash terms for businesses:

VAT deferral data

WPQ 137936: Treasury has provided the following answer to your written parliamentary question (137936): Question: To ask the Chancellor of the Exchequer, how many and what proportion of VAT registered businesses have taken advantage of the deferral of VAT payments due between 20 March and 30 June 2020; and what estimate his Department has made of the amount of VAT that has been deferred. (137936)

Answer: Jesse Norman: Approximately 600,000 businesses have deferred £34bn of VAT due to COVID-19. This equates to approximately 26% of the 2.3 million businesses registered for VAT: https://www.theyworkforyou.com/wrans/?id=2021-01-14.137936.h&s=speaker%3A25165#g137936.q0

Reduced VAT rate for hospitality, and tourism

The Government’s plan for jobs estimated that the cost of the 5% VAT rate would be £4.1 billion for the six months from July 2020 to January 2021. The cost for that six-month period has since been revised down given subsequent lockdowns, but businesses would face a similar cost if the rate returned to 20% as restrictions begin to be lifted: https://www.gov.uk/government/topical-events/plan-for-jobs

The furlough scheme

In the November Economic and Fiscal Outlook, the OBR estimated that the cost of the CJRS (Furlough) would be £3.3 billion in March 2021: https://obr.uk/efo/economic-and-fiscal-outlook-november-2020/

Business rates holiday

The Office for Budget Responsibility has put the cost of business rate relief for 2020-21 at £9.6 billion (including changes to the devolved administrations’ block grants as a result of Barnett consequentials).

Interest payments on government backed loans schemes

Question: To ask the Secretary of State for Business, Energy and Industrial Strategy, how much interest the Government has paid to banks for (a) bounce back loans and (b) Coronavirus Business Interruption Loan Scheme (CBILS); and how much banks have charged the Government for arranging CBILs loans. (144687)

Answer: Paul Scully: The Government covers interest payments on behalf of borrowers for the Bounce Back Loan Scheme (BBLS) and the Coronavirus Business Interruption Loan Scheme (CBILS) for the first 12 months after drawdown of a facility. For CBILS, interest rates and fees will vary between banks and will depend on the specific lending proposal. The interest rate for Bounce Back loans is set at 2.5%.

As of 28 January 2021, the total value of interest payments made for both schemes is as follows:

• Total amount recorded for interest paid to Banks under BBLS: £193,269,778
• Total amount recorded for interest paid to Banks under CBILS: £81,991,145

For CBILS, the Government also covers arrangement fees on behalf of borrowers.

As of 28 January 2021, the total amount recorded for arrangement fees paid to banks is £24,256,440.

Banks are not permitted to charge any fees for administering BBLS: https://www.theyworkforyou.com/wrans/?id=2021-01-27.144687.h&s=speaker%3A25165#g144687.q0

Cash reserves for companies

According to the latest ONS Business Impact of Covid Survey:

• The accommodation and food service activities industry had the highest percentage of businesses with less than three months' cash reserves, at 53%. This was followed by the other service activities industry (which includes hairdressing and other beauty treatment activities), at 51%
• There are 1,976,000 accommodation and food services businesses in England according to the ONS. If the ONS BICS survey results are replicated nationally, that would mean: 1,047,280 (53%) of hospitality businesses have less than three months’ cash reserves and 652,080 (33%) have no or low confidence that their business will survive the next three months

Labour’s jobs recovery package

Labour is calling for a “smart” furlough scheme to protect jobs:

• With 4.6 million people still on furlough, Labour is calling for the Chancellor to immediately announce an extension to the furlough scheme so it remains open while public health restrictions are in place and demand is severely affected
• Labour is also calling for urgent reform to the scheme to make it smarter, with new training incentives to help furloughed workers improve their skills and tough conditions on employers to stop abuse

Labour’s call for business rates relief

Timing

• Labour is calling for the 100% business rates relief for retail, hospitality and leisure businesses to be extended for at least a further six months
• Local councils will need to issue rates letters in the next month, and so to provide certainty government should confirm that rates relief will remain in place until 1 October
• This can then be reviewed at a later date if restrictions are in place and there is still acute pressure on demand

Introduction of a cap

• The Welsh Labour Government has consistently offered more generous support for businesses by adopting a more targeted and responsible approach than the Chancellor
• The UK Government should learn from the Labour Government in Wales and make the rates relief targeted by introducing a cap for essential retail businesses above a certain size, with the cap appropriately calibrated for England
• The Welsh Government applied a cap so that retail, hospitality and leisure businesses with properties with a rateable value of more than £500,000 were not eligible for the relief. By making this change, the Welsh Government freed up an additional £100 million to kickstart its Economic Resilience Fund, enabling grants to 2,000 SMEs. https://gov.wales/written-statement-response-covid-19-economic-crisis
• By contrast, in England large supermarkets and other stores that have not suffered from a fall in demand during the crisis have handed back the money they had saved from rates relief to the Exchequer, amounting to around £2 billion. https://www.theguardian.com/business/2020/dec/03/sainsburys-hands-back-440m-in-covid-business-rates-relief

Cost

• The Office for Budget Responsibility has put the cost of business rate relief for 2020-21 at £9.6 billion (including changes to the devolved administrations’ block grants as a result of Barnett consequentials)
• An extension of six months would therefore cost £4.8 billion, although if a cap were introduced along the lines of the Welsh model, this would be lower

Longer term

• Labour has long called for a root and branch review of business rates to help bricks and mortar retailers compete with online tech giants. It is important that the Government takes that work forward and designs a new system that is fit for purpose

Labour’s call for reduced VAT

Timing

• The Government should extend the temporary 5% reduced rate of VAT for the hospitality, tourism and culture sectors until 1 October or three months after restrictions have been lifted, whichever is later
• As with business rates, the extension should be reviewed closer to the expiry date there is still acute pressure on demand

Cost

• At the 2020 summer statement, the Government expected the cost of the temporary VAT reduction to be £4.1 billion for the six months from 15 July 2020 to 12 January 2021. Since then, the scheme has been extended to 31 March
• In November, the OBR revised down the expected cost of the scheme to £2.5 billion for the full nine months, reflecting consumption levels being lower as the result of another lockdown
• Given there has been a third lockdown since then, the cost is likely to be lower still