The UK Economy: calm before the storm?

17 Feb 2021

Official figures have established that, since the beginning of the pandemic, the British economy has shrunk by more than any other in the G7.  ONS figures published on 12 February 2021 confirmed that output shrank by 9.9% in 2020, taking the economy back to its 2013 size.  It has also been recently reported in the press that there were 583 profit warnings in 2020, the highest for 21 years, and figures published in January 2021 showed that there were 1,228 company insolvencies in December 2020, indicating the first rise in insolvencies since the pandemic hit and an increase of 9.2% on December 2019.
 
Aside from the pandemic, Brexit has caused problems for supply chains right across the economy.  The Road Haulage Association estimates that the volume of exports to the EU in January 2021 was 68% lower than a year earlier.  While some of this is decline in trade is due to the pandemic, it is becoming increasingly clear that the problems being encountered are more than just teething difficulties and are the inevitable consequence of the non-tariff barriers, which have resulted from the UK now being outside the European single market and customs union.  Supplier delivery times have worsened at one of the fastest rates since records began with a British Chamber of Commerce survey this month suggesting that 49% of exporters are suffering problems with the post-Brexit arrangements.
 
Against this background it is perhaps surprising that, despite the increase in December, corporate insolvencies for 2020 as a whole were 27.1% lower than 2019, and were in fact at their lowest level for over a decade.  What these figures show, however, is the extent to which government support is propping up the economy. 
 
Colin Haig, president of R3, the trade body for insolvency and restructuring professionals, has stated that, in his view, the government’s Covid support measures have only deferred rather than prevented the effect of the pandemic being reflected in corporate insolvency levels: many of these support measures are due to be lifted in the coming months.
 
Whilst it is possible that the government may extend some of these schemes further, at present the main schemes that are due to expire before the end of April 2021 are as follows:
  • Protection from eviction is due to expire on 31 March 2021;
  • Business rates relief for the hospitality sector is due to expire on 5 April 2021;
  • The furlough scheme is due to expire on 30 April 2021;
  • The time for applying for Bounce Back Loans and CBILS is due to expire on 31 March 2021;
  • The restrictions on winding up petitions, introduced under the Corporate Insolvency and Governance Act 2020 (“CIGA2020”) are due to expire on 31 March 2021;
  • The relaxation of certain rules governing the new moratorium regime, introduced under CIGA2020 is due to expire on 31 March 2021; and
  • The restrictions on bringing of “wrongful trading claims” against directors (also introduced under CIGA2020) are due to expire on 30 April 2021.
 
And then, of course, there is the budget on 3 March 2021.
 
Given the state of the public finances, the Chancellor will come under pressure to increase taxes.  There is an expectation that Capital Gains Tax may be increased.  The Institute for Fiscal Studies (IFS), however, considers that it is too soon to raise taxes and has suggested that some of the support schemes be phased out over a longer period.  For example, the IFS has suggested that the furlough scheme be extended in a limited and targeted way.
 
Whether the government will extend the period that companies can apply for Bounce Back Loans or loans under CBILS isn’t clear; even if it does not,  these loans will continue to provide essential support for many businesses.  Bounce Back Loans provide for repayment over 6 years, whereas CBILS provides for repayment over 2 to 5 years, depending on the terms agreed.  That said, there is no doubt that many business have taken advantage of these loan schemes. Only when the time for repayment comes round will we see how many businesses will opt for going into an insolvency procedure. 
 
As the temporary support provided by these government schemes is lifted, many businesses will need to consider restructuring options.  CIGA2020 introduces two new schemes which increase the options available for companies in difficulties.  Of most interest perhaps is a new moratorium procedure, which falls short of being a formal insolvency procedure, and which is designed to give companies some breathing space.  In terms of formal restructuring procedures, CIGA2020 introduces a new Restructuring Plan which is similar to existing schemes of arrangement but which incorporates elements of the US Chapter 11 regime. 
 
While the economy has been on ice, there has not been much take up of these procedures, but we can expect this position to change as the thaw sets in and the economy starts to adapt to the new normal.
 

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