Written evidence submitted by Labour Business (COV0081)
Labour Business recognises that emergency measures have had to be put in place to protect people’s lives. However, the economic effects of these measures will be felt for years to come. We must not return to “business as usual”, we must listen to those business leaders who have behaved responsibly, who have been contributing to the economy through taxation and who are now facing the harshest consequences. If these businesses cannot be saved, then we must consider the effects not just on them, but the workers in these businesses. Future planning and honesty is essential if we are to mitigate the worst of the economic damage.
There are still significant gaps in the support schemes announced by the government. Each of these gaps affects people who feel cast adrift and have faced silence. They deserve answers on whether the government will fill these gaps as time is running out for them. Their situation will only deteriorate as they are left to fend for themselves.
The only way that workers whose workplace has been closed or scaled down can access funds is through their employer and the job retention scheme. The government has in effect turned business owners who have tried to help their staff into benefits administrators, with little back up and support.
Many businesses have taken it upon themselves to pay workers on the understanding that they will receive the furlough grant at a later date.
The portal launched on 20th April. While the website itself was stable, the on-line calculator did not work except for the simplest of cases. If someone attempted to ask questions, they were told that there was a wait of 48 hours. Business groups were reporting that lawyers and HR consultants found some of the issues they were facing were confusing. These issues will have led to fewer companies engaging with the scheme.
The retention scheme has not got the flexibility to recognise that some people may need to take part-time furlough, for example those with caring responsibilities who are unable to work from home full-time. Another case where more flexibility s needed is to allow part-time furlough for a key worker in a small business who is only needed in that business part-time due to the down-turn of business activity.
New starter furlough is still an issue to be resolved as thousands of workers are excluded because they took a job too late to benefit.
It is customary for directors of limited companies to take pay through dividends. They are now being punished for following normal practice by not having this source of earnings covered and are being left with very little. These are not “fat cats.”
These grants have been administered with varying degrees of speed depending on the local authority that is administering them; some applicants are still waiting. If grants have not been taken up by eligible businesses, then local authorities need to be given resources to trace those businesses as they may not have access to their business post if closed, and there may be other reasons why they have not claimed. If there is unclaimed money, then it should be redirected to other business support measures.
While it is our understanding that there is a good take-up of these grants, there are still questions about which businesses have been in receipt of grant money and whether they are the same businesses that have seen the worst of the effects. For example, 20% of pubs have a rateable value over £51,000, so they received no grant support and have been forced to close. Other retail operations have managed to continue trading. It has long been known that business rates valuations are a poor indicator of turnover and the number of staff that are employed. Therefore it cannot be assumed that these grants have been an effective use of funding.
Businesses that have topped up the pay of furloughed staff have had to use this grant money, but it is still unclear how many have chosen to do this.
Some businesses are run out of non-rated properties and they should be eligible to receive grant support.
Unclear advice was given about what the grant money was intended for. Companies that collect rent from closed businesses, such as breweries, have been claiming that the grant money is intended to pay them rent. This needs urgent clarification as rent money is already being collected. Other businesses are now in negotiations.
Self-employed people are still waiting for any news about what money they will receive. People are running out of money quickly and need funds.
In addition to this problem, there are significant gaps in the scheme. Adjustments to them could provide the much-needed support to the self-employed.
The newly self-employed are particularly suffering. The newly self-employed must be allowed to file their 2019-20 tax returns in April/May 2020 to qualify for the same self-employed grant as those who have been operating for longer. A report by UK Music reported an increase in the workforce of 45,000 people between 2018 and 2019; and with a 72% self-employment rate in the creative industries, it is reasonable to estimate at least 30,000 people fit in this category in music alone.[1]
Mothers who have been on maternity leave between 2016 and 2019 will effectively have their income support reduced under the new scheme, as it is based on average earnings over this period. The government must urgently allow mothers who fall into this category to nominate which year they would like their level of income support to be based on.
Directors who earn most or all of their income as dividends are left with virtually no support. Many working in the creative industries are directors of limited companies, and are therefore exempt from the Self-Employment Income Support Scheme (SEISS). While they could technically furlough themselves and claim 80% of their PAYE salary, many need to continue working, rescheduling bookings and doing what work they can under current conditions, so are unable to furlough, yet will have seen a devastating drop in income. Additionally, while there are some tax advantages to running as a limited company, many will have been set up in this way at the request of their clients, as many film productions and broadcasters prefer to operate in this way.
This crisis has also exposed the weaknesses in benefit systems including Universal Credit. Self employed workers have been failed for a long time by not having the same access to a safety net as their employed counterparts. It is reprehensible that there are now accusations of self employed workers and directors of limited companies are avoiding tax. Tax systems are opaque and self-assessment complex, so it is customary for workers to employ accountants who naturally give advice to maximise the income of their client. The system has been set up in this way for many years, not by design of the people now using the system. If changes to it are to be made, then it should be done constructively with the self-employed and business owners.
The vast majority of businesses have found that their insurance companies are not paying out under their business interruption insurance.[2]
We note that a lot of businesses believed that they were covered by insurance for business interruption. There is a case now started against Hiscox insurance, one of the main providers to the leisure industry. We await the findings of that case.
An entire sector of the economy is in existential crisis. There are over a million directly employed in the sector, and many more in the supply chain. If we emerge from lock down with social distancing measures still in place, then it will be many months before some businesses are able to open. The hospitality trade does not sell food and drink, it sells a social environment. If pubs are forced to keep their staff and customers distant, then they will not be viable businesses and will be forced to close. If pubs are required to enact social distancing measures, then they will need further financial support or measures put in place to mitigate the damaging effects. These should include:
Speculation that pubs could open and maintain social distancing is unhelpful in the extreme. A bar will not be able to have more than one server and a kitchen will not be able to have more than one chef. Before this speculation goes further, the government needs to consult bar and pub operators.
When businesses re-open, it must only be if their workers and customers are safe. These decisions must be taken by the business owners on a case by case basis. Where a business thinks it can safely reopen if modifications are put in place, then they should be given the necessary support and funding to put these measures in place. We note that money is being made available from the government for innovation: a strand of this funding could be made available to assist business who have to make significant changes to their business practices in order to protect their workers.
Labour Business is concerned that without proper testing, tracking and tracing in place, many workers will not feel safe outside of lockdown and business owners cannot be expected to take up the slack. They require independent advice about procedures put in place to test employees before large business premises and those that require workers to be in close proximity to each other are re-opened.
Many businesses will see a long-term impact on their trade and their workforce. While there are examples of businesses that have not acted responsibly, there are others - small, medium and large - who have acted conscientiously. There must be future conversations between government, businesses, workers and their trade unions about a social contract for a more sustainable economy. We cannot maintain “business as usual.” This social contract must recognise the businesses that have played their part in weathering the crisis, those that have in good faith engaged with the support packages and suffered severe stress and personal loss in doing so.
Covid Corporate Financing Facility (CCFF)
CCFF is a Bank of England initiative to provide short-term (up to 12 months) loans to non-finance companies operating in the UK and adversely affected by the Covid crisis. The Bank of England has specifically said that companies receiving or eligible for funds “will not be made public” and such businesses are being made to sign confidentiality agreements. The main conditions for companies are, that they must be:
· Companies (including their finance subsidiaries) that make a material contribution to economic activity in the United Kingdom. Eligibility decisions will be made by our risk management staff, taking into account a number of different factors.
· UK incorporated companies, including those with foreign-incorporated parents and with a genuine business in the UK, will normally be regarded as meeting this requirement.
· Companies with significant employment in the UK or with their headquarters in the UK will normally be regarded as meeting this requirement. We will also consider whether the company generates significant revenues in the UK, serves a large number of customers in the UK or has a number of operating sites in the UK.[3]
According to the Bank of England weekly report dated 22 April 2020, £11,218m had been loaned by that date. The companies and terms are meant to be confidential, but some companies have broken ranks and spoken to the media. According to press reports these include EasyJet, Redrow and Greggs who have secured £600m, £300m, and £150m respectively.[4]
We have a number of concerns. First, eligibility for the facility is tested on the company’s financial viability pre-Covid, and the credit terms are based on that position. In their current position, they may well be unlikely to be able to repay. Alternatively, given the apparent lack of conditionality on these loans, and lack of requirement that the companies first test the market, some of the recipients may be using the scheme as a cheap alternative to commercial finance, and additionally may be using tax havens or private equity financing to minimise their UK tax payments. We therefore suggest that the UK government should consider:
· Making loans only after significant contributions from stock & bond holders.
· Banning loans to companies making use of tax havens (as Denmark has done).[5]
· Banning loans to companies using private equity financing to evade paying UK tax.
· Using insolvency laws to take over insolvent companies (rather than providing cheap unrepayable finance) and then either running them or selling the profitable parts. Both of these would preserve employment.
In summary, we consider that without such conditions, there is a danger that the Covid 19 recession will, like the 2008 banking crisis, allow private companies to retain profits made in good times while the state and ultimately the tax payer assumes the burden of losses made as a result of a crisis. We invite the Select Committee to reject the proposition that taxpayers should socialise the liabilities of these companies while allowing their owners to privatise the resulting profits.
[1] https://www.ukmusic.org/assets/general/Music_By_Numbers_2019_Report.pdf
https://www.ukmusic.org/research/report-archive/measuring-music/measuring-music-2018
[2] See, e.g., https://www.bbc.co.uk/news/uk-wales-52399815
[3] https://www.bankofengland.co.uk/news/2020/march/the-covid-corporate-financing-facility
[4] https://www.theguardian.com/business/2020/apr/06/easyjet-secures-600m-coronavirus-loan-from-uk-treasury-and-bank
[5] https://www.independent.co.uk/news/business/analysis-and-features/coronavirus-denmark-bailout-tax-haven-companies-uk-richard-branson-a9475081.html