What to consider as lockdown eases

Building resilience in your business as lockdown eases. 2 key areas of focus for SME businesses are 1) working capital and 2) improving staff engagement.

Business resilience

All SMEs have had to focus on cashflow throughout the pandemic. As the lockdown eases, you shouldn’t overlook this as the risks SMEs face may escalate. First of all, some of the headlines:

The pandemic has led to one of the largest economic downturns on record, leading to a negative impact on GDP of 12%. Companies have added debt to their balance sheet as a result of the pandemic, through both traditional means and Government support schemes, with over £75 billion being loaned since March 2020:- 

Scheme type

Applications approved

Value of funds £billion

Coronavirus Business Interruption Loan Scheme



Coronavirus Large Business Interruption Loan Scheme



Bounce Back Loan Scheme



* UK Government figures as of 21 March 2021 

The Government estimates that 42% of these loans will not be repaid. If these businesses fail to repay the government, you need to make sure that if they are your customers, they do not fail to pay you.

There exists a hidden level of distress in many businesses across most sectors due to the depletion of working capital and reserves.  Further stress is likely when businesses consider future trading and the growth of their business.  A balancing act of servicing their increased borrowing, repaying any build-up of creditor arrears, making any deferred payments to HMRC, together with funding new growth, may lead to even greater pressure on working capital.

The old adage of cash being king will remain true and the need to protect working capital will be more important than ever, given the competing claims on the cash available.  It is important to ensure that you are on top of your financial information.

Increasing turnover and new growth will provide benefits such as increasing working capital for those companies with invoice finance facilities.  Such facilities accelerate the working capital cycle, but caution is needed to ensure that the resulting debtors pay within contractual terms.  Late payment by debtors can lead to disapprovals on such facilities, which can create a sudden reversal of the benefit they provide.

A further note of caution is that focusing merely on sales can lead to growth at the expense of margin, which is commonly referred to as “buying in turnover”, This was evident across certain sectors in 2009. A long-standing fact is that more businesses fail coming out of a recession, than during the recession.  Given significant business failures are predicted, being paid for work on the payment terms agreed and not placing too much reliance on one customer are also considerations worth noting.

Key considerations for SME businesses in your relationships with customers:

  • Before - Review financial information and credit reports for key customers
  • During - Maintain your gross profit margins
  • After    - Ensure customers continue to meet payment terms

Retaining and motivating staff

Turning to the staff that you employ, what can you do to make their lives easier, save money on your employment costs and improve and incentivise performance. Ian Goodwin from our Employment Taxes team provides some ideas:

Tip 1 – Remote working

As we emerge from lockdown, working patterns may have shifted for good. There will be a balance to be struck between being office-based and working from home which saves time and can lead to reward changes. For example, you may look to offer your employees an income tax and NIC free home working allowance of £6 per week. This will increase their net pay and help you maximise reward efficiencies to stay ahead of the competition.

Where employees are working from home, you may also choose to offer them the chance to install an EV charging point and sustainable home energy via salary sacrifice – this will help retain key employees, reduce expense costs and also increase employee take-home pay.

Tip 2 – Training

With society and demands adapting due to Covid-19, training your employees to learn new skills can make a difference to your business success. Additionally, it may reduce costs too given that:

  • If you employ an apprentice under the age of 25, you do not pay employer NIC on their salary; and
  • You can utilise Government funding to pay for qualifying apprenticeship training, reducing your training costs.

This helps benefit the whole business. You may then look to have apprenticeship programmes running throughout the business from entry-level employees starting their career to key management talent to retain them in the business and help build on your success.

Tip 3 – Christmas greetings

The annual Christmas Party was cancelled for 2020, but the annual allowances are still there for 2021/22. Planning ad-hoc gifts and employee rewards can sometimes lead to unintended tax bills, but being aware and making use of HMRC’s £50 trivial benefit and £150 annual function exemptions can make a big difference to the tax you pay and mean you make different plans when budgeting for the year ahead. 

Tip 4 – Go electric

A lot of major decisions were delayed last year, many included the change of a vehicle as collectively there was a significant reduction in average miles driven, some estimates suggest by one-third of the previous peak. As we adapt to these changes and consider the environmental impact, electric vehicles will become more the norm. As an incentive, significant income tax and NIC savings can be achieved by choosing an electric or hybrid vehicle compared to a traditional diesel company car. By way of comparison:

  • A Tesla Model 3 with a list price of £40,000 will have an annual income tax bill of £160 and annual employer  Class 1A NIC charge of £55;
  • A BMW 3 Series of the same value with 132 g/km will have an annual income tax bill of £4,800 plus employer Class 1A NIC of £1,656. 

That’s an annual saving of over £6,000. As well as the savings on the car itself, savings will also be made on travel costs (given electric travel is cheaper than diesel), and also you will be helping the business improve its sustainability and carbon efficiency. Salary Sacrifice may help you introduce this to other staff members too.

Tip 5 – Introduce Pension Salary Sacrifice for your workforce.

In the final article of this newsletter we consider the SME owners retirement plans, but also helping your employees save for retirement continues to be really important. You have to enrol your employees in a pension scheme due to automatic enrolment regulations and you and the employee make pension contributions. Every time your employee contributes, you both pay National Insurance (NIC) on this contribution. However, you can save NIC by putting in place an arrangement to exchange (give up) employee pay for an additional employer contribution of equivalent value. For every £1,000 sacrificed, the employee will increase their net pay by £120 per year (if earning less than £50,000 per year) and the employer will save £138 per year.

To enhance this further, you can also look at giving employees the option to exchange their bonus for an additional employer pension contribution.

Plenty of things there to think about as the opportunity arises as lockdown lifts and you get time to think about some short-term planning. 

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