Recovery loan and the super-deduction: can they save businesses?

Accountants give their views on the new measures outlined in the Budget.

Out of all of the measures outlined in the Budget last week, the ‘super-deduction’ on investments and the Recovery Loan Scheme were two of the biggest wins for members.

The super-deduction on investments comes into effect next month and will end after 31 March 2023. Companies can claim on qualifying expenditures during that period:

• allowances of 130% on most new plant and machinery investments that ordinarily qualify for 18% main rate writing down allowances
• a first-year allowance of 50% on most new plant and machinery investments that ordinarily qualify for the 6% special rate.

The Recovery Loan Scheme will launch on 6 April 2021, following the closure of current CBILS and BBLS on 31 March 2021. It is scheduled to run until 31 December 2021, but this is subject to review. The new scheme aims to help businesses affected by COVID-19:

• It can be used for any legitimate business purpose, including managing cashflow, investment and growth.
• The maximum value of a facility provided under the scheme will be £10m per business.
• Minimum facility sizes vary, starting at £1,000 for asset and invoice finance, and £25,001 for term loans and overdrafts.

There will be no turnover restriction for businesses accessing the scheme. Businesses will be able to choose from a variety of products including term loans, overdrafts, asset finance and invoice finance facilities. Term loans and asset finance facilities are available for up to six years, with overdrafts and invoice finance available for up to three years.

What will this mean for businesses in reality? We asked accountants for their views.

The Super-deduction misses a trick by limiting to plant and machinery

James Poyser, CEO of inniAccounts

As a service business, we treat service spend as a first-class citizen. We ensure we’re investing in growing our balance sheet through service spend, as well as simple spending to do business.

This means when I look across my organisation, I can clearly see how our spending on services are capital or revenue in nature. We’re used to tracking this and it brings us many benefits. As a CEO I keep a keen eye on how our spend on services impacts our balance sheet or P&L.

FR102 gave us the breakthrough to capitalise these intangible assets with confidence, and this level of reporting is also useful to support our R&D tax claims.

When super-deductions were announced by the Chancellor, there was a profound sense of excitement. We’re planning on making significant investments in services to build new software features, strengthening our balance sheet and paving the way for future growth. A super-deduction for service spend would have encouraged us to be even more ambitious – and that would, without doubt, have translated into investing more of our reserves in spending with other small business, and creating jobs.

But alas, it’s not meant to be. The super-deductions are restricted to plant and machinery. To me, this hints how out of touch, at times, HMT can be with our economy; 71% of the UK’s GDP comes from services. How much comes from those who rely heavily on plant and machinery? It will be a fraction of that.

Verdict: I would imagine part of their rationale will be to mitigate potential fraud. It’s easy for HMRC to audit if someone’s bought a press machine. It’s less straightforward to audit intangible assets. But, if we do want to continue to be a services powerhouse, it would be great if HMRC/HMT could work harder to ensure that such risks don’t stand in the way of business investment.

Determining recovery is more complex than box-ticking

Steve Richardson, a director at Reparo Finance

Eligibility for the recovery loan scheme focuses on the viability of a business pre-pandemic, how it’s been impacted by COVID-19 disruption and trading status. Although this all makes sense, it cannot wholly pinpoint a company’s prospects of recovery, as there’s so many variables to consider. Determining recovery is much more complex and if it’s left to automated, box-ticking led underwriting, it may leave a number of viable SMEs high and dry when it comes to successful loan applications and quickly accessing finance.

The flexibility of the recovery loans is a benefit to business

John McCaffery, Tax Partner and Head of Tax at Alexander & Co

The Super-Deduction Tax Relief is a useful relief and may well encourage capital expenditure. It is early days, but Alexander & Co will be claiming the relief on behalf of clients and be advising them on the tax benefits of capital expenditure under this new relief.

Details of the Recovery Loan are yet to be published, it appears to be on similar terms to previous support loans. It could well provide a new cash injection for businesses and the government guarantee will provide more comfort to lenders than borrowers.

 Compared to previous support loans, at this early stage it appears there is more flexibility with the size of businesses that can apply. This is obviously an advantage.

Verdict: We would advise clients to only take recovery loans out if they are confident that they can repay the loans. In support of this, we strongly advise clients to make sure that accounting records are up to date and they have prepared accurate forecasts, which we can assist with.

The Recovery Loan Scheme could create a new legion of ‘zombies’

Greg Taylor, head of financial solutions, MHA Macintyre Hudson

The structure of the Recovery Loan Scheme gives banks and other types of lenders an incentive to keep companies with weak long-term prospects alive and risks creating a legion of ‘zombie companies’. By allowing businesses which are not viable in the long term to continue operating can hinder the restructuring of capital and labour from less productive businesses to more productive ones.

The new Super-Deduction is the biggest positive news coming out of the budget, allowing businesses to claim a whopping 130% of their new machinery cost as a tax cut. This will stimulate investment in the short-term. In fact, the Office for Budget Responsibility (OBR) is predicting that this measure will boost business investment quite significantly, at least in the short term.

Clients should take robust professional advice and hold off taking on further debt until the criteria of each of these initiatives is known. Taking a medium view around debt will be the key in coming out of the pandemic and lockdown to either thrive or just survive.

Verdict: The Recovery Loan Scheme and Super Deduction are welcome initiatives and can help stimulate investment, however there’s a risk that the Recovery Loan Scheme could create ‘zombie companies’.

Mark Rowland is a journalist and former editor of Accounting Technician and 20 magazine.