While in principle, I do not have a problem to Governments bailing out companies that have been adversely affected by the Covid-19 pandemic. I believe that any Government’s first responsibility is to the people of the country and mass unemployment is not a desirable outcome, however, as with everything, there are caveats.
I fear that the initiatives by the government have been ill thought through, not least the potential inflationary aspects.
So, firstly, the company should have it’s tax domicile as the UK. secondly it should have UK domiciled citizens as the majority shareholders and thirdly it should not be paying management fees or any other material amounts (license fees etc) to non UK entities.. These requirements are in order to be sure that the UK economy is the main beneficiary of the activities of the company.
The bailout should be by way of loans, of indefinite period, carrying an interest rate equal to the annual average cost of borrowing by the UK government plus an admin fee to the bank that acts in administering the loan, say 1.5%. Under all circumstances, except where National security is involved direct grants should be avoided.
The next thing I would want applied is that the company should be prohibited from paying dividends, or capital distributions to shareholders (for example, by loans or payments outside of the normal course of business), until a predefined level of debt repayment has been achieved. I would also want the company to issue redeemable preference shares to the government based on the proportion of net tangible assets funded by the loan. These shares to rank ‘parri passu’ with other shares in the company in regard to dividends or a liquidation.This change in their articles of association to be automatically recorded in Companies House.
In cases where small ‘contractor type’ businesses have been paying their working Directors by dividends instead of salary and are thus not eligible for furlough relief they could choose to undo the tax avoidance aspect of this scheme and agree to the last 3 years dividend income being treated as a salary for both the company and the Director, with a deferral of payment of the additional tax liability by the Director.
Finally I would want the Directors to become personally liable in the event of the company not abiding by the dividend or capital distribution rules set above.
Things you will note about this approach, are that they would disqualify Virgin Atlantic and probably Tata Steel from being eligible for a bailout. The philosophy is fairly simple the taxpayer of the UK should not be asked to support businesses that result in resources leaking out of the UK economy. If any business was indeed viable, someone will step in to fill the gap, if there is a liquidation, be it one of their competitors increasing capacity or a takeover of the assets by someone else. If it was not potentially viable it’s existence is a distortion of the market.
By making the loan indefinite in time, one is able to mitigate the potential cost push inflationary aspects of a bailout, as the only means of generating the cash flow required to retire the loan would be by increasing prices.
While the Covid-19 epidemic is tragic, and the taxpayer is being asked to foot the bill for bailing out the economy, we should be making use of the circumstance to fix things that are wrong with our tax system. For example, sort out the Non-Dom status of people owning and running businesses in the UK. Foreign Directors should at least be liable for ordinary income tax on their earnings out of the UK.