The end of furlough: how should SMEs prepare?

On 30 September, the furlough scheme is set to end. We look at how losing the biggest financial support program available during the pandemic will impact SMEs.

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The Coronavirus Job Retention Scheme (CJRS) has been a bedrock for nearly all small businesses during the financial crisis caused by the ongoing coronavirus pandemic.

Millions of workers and thousands of businesses have benefited from the scheme. But this coming Friday signals the end of furlough and with it, the end of the most high-profile financial support seen during the pandemic.

But with the recent rise in national insurance, fuel prices and supply chain delays, there are challenges aplenty being thrown into the mix as firms fight to stay solvent.

As September 30 approaches, we ask legal and HR experts for their thoughts on the end of the furlough scheme, as well as looking at how small businesses should prepare for the impact.

How has the furlough scheme benefited small businesses?

The CJRS scheme has been the most well-used and well-publicised business support scheme during the pandemic, essentially acting as one giant bandage for UK SMEs.

The enterprise saw the government contributing 80% of wages for all employed staff. In July, a 10% contribution from firms was required, with the government’s contribution lowering to 70%. In August and September, it was 60% from the government, with 20% coming from employers. Come October 1, employers will return to paying 100% of wages as the support ends.

The government’s CJRS statistics from the 9 September show that a total of 11.6 million employed people (30% of the UK workforce) were furloughed from March 2020, when the scheme began. Meanwhile, figures from the Chamber of Commerce found 70% of small businesses had furloughed staff members by May 2020, the end of the first lockdown.

Hospitality was the industry with the highest number of claims with a total of £5.1 bn being paid out as furlough money. This was undoubtedly due to the closure of public spaces and subsequent loss of footfall for UK high streets during Lockdowns 1, 2 and 3.

It’s hard to measure just how positive an impact the CJRS scheme has had, as we don’t know what scenario would have occurred without it. However, it’s safe to say that it has helped to prevent a substantial number of job losses. The Insolvency Service reported that August 2021 saw the lowest figure for proposed job cuts in seven years.

What will the impact be on SMEs?

Many small businesses have successfully weaned themselves off the furlough scheme and are recovering well from the impact of the COVID-19 pandemic. In June, around 1.9 million people were still on furlough. This means that just less than 10 million people have now returned to full-time or part-time work since the outbreak began, and the majority of firms are no longer making use of the scheme.

However, the end of furlough comes alongside other issues facing small businesses, such as the recent rise in national insurance tax, the surge in fuel and gas prices, and the ongoing staff and skills shortage caused by Brexit and the Pingdemic.

Combined with these problems, there are concerns among leaders and business experts that the end of the furlough scheme could have a devastating impact on SMEs, particularly those for whom business has still not returned to pre-pandemic levels.

In a press release, Mike Cherry, National Chair of the Federation for Small Businesses (FSB), said: “Seven in ten of the million plus people supported by the job retention scheme belong to businesses with fewer than 50 staff. It’s the smallest employers, and their teams, that will bear the brunt of furlough’s wind-down. “What small businesses are looking for at this point is measures to facilitate the confidence and cash flow they need to retain and recruit as we head into the critical final quarter of the year. As such, last week’s announcement of NICs and dividend tax hikes came as a real blow.”

To break down the costs, a business which currently employs two furloughed members of staff on the living wage, outside of London, would currently be spending £591.80 per month on salary, pension and national insurance contributions.

However, from October 1, with 80% of wages no longer covered by the furlough scheme, this cost will balloon to £2,959. It’s a huge upsurge – and one which many small firms will simply not be able to afford during the recovery period.

How can SMEs prepare for the end of furlough?

There is no set process for ending furlough – unless your business has previously agreed plans with your employees. However, there are a number of things you can do before the furlough scheme ends, to make sure you are prepared for the change.

Examine your finances

Financial assessment should be a top priority for SMEs that are still relying on the furlough scheme. Chances are, the impact of the end of furlough could reduce your cash flow to levels much lower than your financial position pre-pandemic.

As the tap is turned off, companies are now facing a critical planning period – which is why cash flow forecasting is the way to go. The process, also known as cash flow projecting, is designed to analyse your current cash flow and estimate what it will be like over the coming months so you can predict your financial position in anything from six months to a year’s time.

If you want to be able to calculate your cash flow and see where your business will stand in future, you can create automated reports using accounting software products, like Freshbooks or Quickbooks.

Not sure which accounting software would work best for your business? Read our expert review of the top accounting software options for small businesses.

Make sure you haven’t over claimed

The government is expected to come down hard on businesses which might have over claimed on furlough support, whether intentional or accidental. HMRC and the National Audit Office estimate between 5-10% of the total furlough money claimed could represent overclaims.

The scheme has been complex from the start and difficult for anyone, besides a tax expert, to get their heads around. Accounting errors are to be expected during most financial administrations, but there are fears that 2022 will see fines being distributed to cash-strapped small businesses for innocent mistakes.

All this means it’s a good idea to get ahead of the issue and make sure you’ve not made any slip ups. Set time and resources aside to have a thorough review of your furlough claims, whether on your own or with an accountant, to ensure you can make arrangements to pay HMRC any money owed, and avoid paying interest or incurring fines.

Re-onboard employees

Another key consideration for the post-furlough period is the reintroduction of employees who, in some cases, have been away from work for over 18 months.

Laura Kearsley is a partner and solicitor specialising in employment law at Nelsons, a law firm. Kearsley says: “While employers aren’t legally obliged to give notice when recalling staff members from furlough, it’s advisable to do this with at least a week’s notice as it allows the employee the opportunity to make any necessary arrangements and be aware of any new requirements, including issues directly related to the pandemic – for example, if they need to carry out regular lateral flow tests.

It’s also worth bearing in mind that some staff members may benefit from receiving training as certain aspects of their jobs may have changed, or they might simply need re-familiarising after such a long period of time away from their role. Employees who’ve been furloughed might have been affected by their prolonged period away from work in a number of ways. Reintegrating workers who’ve been on long-term furlough is unknown territory for both employers and employees, which is why it’s important to constantly monitor and adapt return to work strategies.”

It can be difficult to find the right online platform to help employees find information on things like onboarding and training guides. Read our list of the top 5 HR systems for small businesses to find out about which provider is the best for your small firm.

Keep an eye out for government announcements

If Boris Johnson’s cabinet has proved anything this year, it’s that they love a good old-fashioned U-turn. There is a chance that the furlough scheme, or coronavirus business support in general, will not be fully withdrawn this year. An announcement is certainly possible in the upcoming autumn budget, so it’s a good idea to keep an eye and ear out for any news.

The Gov.uk website lists any and all programs available for businesses to take advantage of during COVID-19, and is a good source to go to for any updates. This includes the Business Rates Relief which lowered the rate to 66% for retail, leisure and hospitality businesses, and is set to continue until April 2022, the end of the tax year.

Know what other schemes are ending

  • The Recovery Loan Scheme (RLS) was open to any business which could prove it was negatively impacted by the pandemic. It will close on 31 December 2021, subject to review.
  • The reduction of VAT to 5% for certain hospitality supplies will end in September 2021, followed by a higher reduced rate of 12.5% until 31 March 2022.

Furlough scheme FAQs

What do I do about holiday pay?

Legally, furloughed employees have been able to accrue statutory leave entitlement during their time off, which means that small business owners will need to prepare for staff members returning to work with a much larger than usual number of holiday days. This could spell trouble for typically busier trading periods, such as Christmas, where all hands are needed on deck.

Emma Gross is an employment partner with law firm Spencer West LLP. Gross tells us: “The question of what is reasonably practicable [for granting employees holidays] has been left intentionally open to wide interpretation. Workers who are on furlough are unlikely to need to carry forward statutory annual leave, as they will be able to take it during the furlough period. However, they must be paid the correct holiday pay for their salary, meaning an employer would have to top up their furlough grant. If, due to the impact of coronavirus, the employer can’t afford the difference, it is likely that this would make it not reasonably practicable for the worker to take their leave, enabling the worker to carry their annual leave forward.”

Under new government regulations, you can also choose to spread your employee’s annual leave over the next two years, in order to reduce the likelihood of it impacting on staff levels.

What if I need to make employees redundant?

Rick Smith is managing director at Forbes Burton, an insolvency and business rescue specialist. Smith says employers can make staff redundant following furlough “if the business cannot survive without them being made. Business activities/operations may never be the same or return to normal after the COVID pandemic. If businesses are forced to make redundancies at the end of furlough, then they need to adhere to all government guidelines to keep themselves safe from the risk of unfair dismissal claims that may come up in the future. The selection and consultation process for redundancy needs to be fair and carried out correctly.”

What are the alternative options for making employees redundant?

Nobody wants to fire an employee, and there are some alternative options in place you can look to in order to avoid that eventuality.

However, is is important to remember that with any of these options, all changes to a contract must be approved by the employee before being agreed to.

Altering your employee contracts

Rather than immediately terminating their contract, it might be financially viable to reduce an employee’s hours, temporarily or permanently, to keep them in part-time employment and streamline your resources for added efficiencies.

Making temporary lay-offs

Some employees may agree to delay their return to work as a short-term solution, in order to give you more time to understand/improve your financial situation.

Adding or changing employee responsibilities

Perhaps you’ve identified an employee whose role is no longer necessary for your business, which might have adapted during the pandemic to fulfill a different function. Is there an area of the firm which might benefit from their expertise?

Consider moving your employee into a different role if your business needs have changed. In this case, make sure the new role is newly defined and the employee is 100% on board with the transition.

What if I need to close down my business?

Sadly, some small businesses simply do not have the assets or cash reserves to survive the end of the furlough scheme. If this is the case, you will need to take steps to prepare to close down your business.

Rick Smith, from Forbes Burton, says: “If the furlough scheme coming to an end looks likely to have a devastating effect on a company, then it may be time to consider closing it. This may really be the best option if the business is not viable and needs to be closed to make sure no more debt is built up. The best way to do this when a business has staff is to liquidate the company.

A Creditors Voluntary Liquidation (CVL) may be the best solution if a company is struggling with debt, cash flow problems, or suffering from creditor pressure. During a liquidation, the assets and/or funds are sold to pay back creditors what they are owed.

If there aren’t enough assets, redundancy claims from the Redundancy Payments Office can be made, which are used to cover the cost of a liquidation. Redundancy claims can also be made by all the staff affected by the company closure.”

Helena is from Yorkshire and joined Startups in 2021 from a background in B2B communications. She has previously written for a popular fintech startup covering everything from money-saving tips to cultural reviews.

She is particularly interested in project management software and the films of Peter Jackson.

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