We’ve been monitoring high-growth, ambitious companies in the UK for over a decade, but at no point more closely than the past couple of weeks. The COVID-19 pandemic has sent shockwaves through the economy, with the 30,000 ambitious companies we track – and the UK’s 3.8m SMEs in general – being particularly badly affected. These smaller companies can’t afford to keep large reserves of cash, meaning they’re especially vulnerable to sudden economic shocks. And with 3.3m employed by ambitious companies – and 16m by SMEs more broadly – this goes well beyond being simply a “business problem”. It’s a problem for society and, for millions of households, a very personal problem too.
We’re working on an enormous project to bring you up-to-date data on the impact on these ambitious companies. We will have the full results of this exercise in less than a fortnight. But time is of the essence, so we’re taking the unusual step of setting out our ideas for action before all the data are available. The Government has acted quickly to implement unprecedented measures that assist businesses. But we believe that further action is needed right now.
Some of these ideas are our own, whilst some draw attention to the work of others including Save our Startups, Coadec, The Entrepreneur’s Network, ICAEW, CBI, British Chambers of Commerce and the FSB.
- Keep economic activity up by rewarding employers for retaining people in active employment
- Radically reform the coronavirus loan scheme (CBILS) to allow SMEs to access cash fast
- Promote continued investment in innovation through temporary changes to R&D tax credits.
Rewarding employers for keeping people in active employment
The Coronavirus Job Retention Scheme is a fantastic invention and is rightly helping millions of businesses who have been forced to cease operations. However, it presents a predicament for businesses that are technically (and safely) able to continue operating.
Despite not being shut down, these businesses are seeing significant short-term dips in revenue and massive increases in uncertainty about the long-term. They’re having to decide whether to shut up shop in order to preserve their cash and receive what is, in effect, a government grant for stopping work, or whether to take the risk and carry on work. We believe that too many business owners and operators are feeling like they have to choose the former option, with the result being too many employees taken out of productive employment.
Our view is best described by Howard Marks in his recent letter: “The Treasury can make up for people’s lost wages, but people need the things wages buy. So replacing lost wages and revenues will not be enough for long: the economy has to produce goods and services.”
We believe that the solution is to incentivise continued productive employment. The Government must reward SME employers for taking on the economic risk and for declining to pass the burden of their employees to the state.
The simplest way of doing this would be to offer a 20% wage subsidy for all those employed by SMEs who aren’t furloughed, up to a cap of £625 per month. This would mirror the 80% of employee costs up to £2500 per month covered by the CJRS. The grant could be claimed easily through the same system that HMRC is putting in place for furlough claims. This would be a strong incentive for employers to keep employees in productive work (where safe and legal to do so) and would significantly limit the incoming fall in GDP, all at very limited cost to the Government.¹
Ensuring SMEs can access loans fast
Despite recent tweaks to the CBILS scheme (and rumoured further changes), it’s clear that many SMEs are struggling to access the capital they need in the timeframe necessary. SMEs are still facing the prospect of undertaking a full loan application, an assessment of viability (albeit slightly relaxed), high interest rates, personal guarantees for larger loans and more. We’d be extremely surprised if the scheme, as currently formed, delivers for SMEs in general; it definitely won’t work for the majority of ambitious companies we track. The early data supports our view.
The solution is actually relatively simple: copy the Swiss.
The Swiss scheme allows companies to access lower value loans – up to 10% of annual revenues – pretty much immediately with almost no caveats. These smaller loans are fully guaranteed by the Government. Larger loans are 85% government guaranteed, interest rates are capped and processing is fast. Banks are the conduit for this cash, but decisions are quick and based on the bare minimum of due diligence. At the very least we should copy, and copy fast.
In addition, the ideas set out by Thomas F Huertas in his letter in the FT are worthy of consideration. In particular, the proposal for opening up a one-year revolving line of credit for up to six months’ revenue – government backed and at a low rate of interest – specifically for use on qualified expenses (wages, rent, utilities, suppliers, insurance and interest) could be transformational. With the Government being the lender of record, and refinancing on commercial rates offered down the line, this could inject significant capital directly to SMEs and aid with a rapid recovery.
Promote innovation through R&D Tax Credits
In a crisis like this, the first thing that businesses stop is investment in the future. Yet that is precisely what we need right now if the economy is going to bounce back strongly instead of entering a prolonged depression.
We propose that the Government doubles down (quite literally) on incentivising investment in innovation. A doubling of R&D tax credits for claims during this tax year would provide a significant reduction in costs for profitable businesses and a very welcome additional grant for loss-making ambitious companies.
In addition, reassurance needs to be given by HMRC that R&D tax credit payments won’t be netted off against the Q2/20 VAT bills that the Government has deferred payment of. For a start, it’s unfair to penalise firms that are investing in R&D by reducing their ability to benefit from one of the Government’s flagship measures. Such reassurance would also allow companies to make use of the burgeoning market for borrowing against future R&D claims to access the cash they need even sooner than HMRC can deliver.
We also wholeheartedly agree with the call made by the Save Our Startups campaign and elsewhere for these payments to be fast-tracked.
We believe that these policies enacted as a whole will enable all SMEs to make better decisions about their businesses and their employees. Furthermore, they would allow the UK’s most ambitious and innovative firms to carry on investing at a time when the need for innovation, jobs, and growth has never been greater. And last, but by no means least, they would significantly limit the impact on GDP, society, individuals and households up and down the country at this time of national emergency. We encourage the Government to look at implementing such measures as a matter of urgency.
Co-founder and CEO
Head of Research and Consultancy
¹Latest estimates are that a third of the UK workforce will be furloughed. Let’s consider a sample set of 30,000 employees. Currently 10,000 of these are likely to be furloughed at a maximum cost to the Government of £25m per month (we’ll ignore employer’s NI and pension contributions for simplicity here). Just 20,000 people are left in productive work. We’d therefore expect to see a 33% drop in GDP contribution from this sample set.
Were the Government to implement our proposal, we believe employers would be given the comfort and assistance they need to move a significant proportion of furloughed employees back onto their payroll – let’s assume 40%. We’d now have just 6,000 furloughed employees in our sample set and 24,000 productive employees. Furlough costs would fall to at most £15m per month; subsidy for employees in productive work would be up to £15m per month. The maximum cost to the Government would therefore rise by £5m to £30m a month. But in the process we’ve both limited the fall in GDP to 20% and given employers the cash and reassurance they need to continue producing and investing in the future of their businesses and their staff. We’d also expect to see fewer businesses go into administration and therefore fewer people out of work in the medium-term, further reducing the net cost to the Government.