April 2020

The past fortnight has been an extraordinary time for the world, and art galleries, auction houses and art fairs have been hit, like most other businesses, by the devastating impact of Covid-19.

As the dust begins to settle and we all try to adjust to a new reality, we are seeing that the issues unfolding are significant and complex.

We have already seen art businesses exposed to a heightened risk of legal issues arising across their business. In particular, counterparties may seek to delay and/or avoid performance (or liability for non-performance) of their contractual obligations and/or to terminate contracts, either because coronavirus has legitimately prevented them from performing their contractual obligations, or because they are seeking to use it as an excuse to extricate themselves from a bad deal. Parties may also cite coronavirus as a basis for renegotiation of price or other key contractual provisions. The virus may also trigger conflict with other legal obligations (such as employers reconciling the steps they need to take to ensure business continuity with their duty of care towards their employees).

Companies are cutting costs and acting to shore up cash flow. This detailed Guide for Art Businesses covers the Government initiatives that may be relevant to your business.

COMPANY SUPPORT

GOVERNMENT SUPPORT FOR PAYE STAFF

1   Furloughed Workers:

The new Coronavirus Job Retention Scheme allows employers to apply for a grant from HMRC to cover 80% of the salary of retained employees (up to a total of £2,500 per month, per employee), plus the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on that salary.

The employees covered by this Scheme – termed “furloughed workers” – must have consented to it (and any reduction in salary), and they remain on the payroll but must cease to carry out any work for the employer. Employers can choose whether to top up the 80% salary. If the alternative to these arrangements is redundancy, possibly in circumstances where the employer may not be able to meet their obligations to pay statutory or enhanced redundancy pay or notice pay, employees may readily agree. However, employers should also remember that the Scheme remains subject to existing employment law and contracts of employment.

The scheme is due to run for three months from 1 March 2020. As with many of the measures implemented by Government, the details of the scheme are due to be released in the coming weeks, with the scheme itself intended to be fully set up (to work retroactively from 1 March 2020) by the end of April.

2   Statutory Sick Pay (SSP):

Legislation is being passed for SSP to be paid from day one of absence (rather than day four) if a member of Staff is absent from work or needs to stay at home due to COVID-19. This will apply retrospectively from 13 March 2020. SSP is currently £94.25 per week for up to 28 weeks.

Employers will need to check that Staff are eligible for SSP. The Staff member should where applicable obtain an isolation note from NHS 111, which replaces the need for a sick note in relation to COVID-19. Employers with fewer than 250 employees will be able to reclaim costs of SSP for sickness absence due to COVID-19 – this refund will cover up to 2 weeks’ SSP per eligible employee.

3   Universal Credit/ Working Tax Credit:

A salary reduction could make a worker eligible for support through the welfare system, including Universal Credit and/or Employment and Support Allowance.

GOVERNMENT SUPPORT FOR COMPANY CASHFLOW

1   VAT:

The Government has deferred the payment of Value Added Tax from 20 March 2020 to 30 June 2020. This is an automatic scheme and taxpayers are afforded until the end of the 2020/2021 tax year to pay any liabilities that have accumulated during the deferral period.

VAT refunds and reclaims will be paid as normal. If it is practicable to move forward an accounting reference date, the VAT reclaim can be helpful for immediate cashflow purposes, although professional advice should be taken to ensure that any other impacts are assessed.

2   Self-Assessment Income Tax:

The Government has also announced that income tax payments due in July 2020 under the Self-Assessment system may be deferred until January 2021.

3   Business Rates:

The Government will provide additional Small Business Grant Scheme funding for local authorities to support small businesses that already pay little or no business rates. This will provide a one-off grant of £10,000 to eligible businesses to help meet their ongoing business costs. There are larger sums available for other businesses.

4   Business Interruption Loan Scheme:

This is available for companies with a turnover of less than £45m from 40 accredited lenders (including all major banks), provided that the companies are credit-worthy with access to loans, overdrafts, invoice finance and asset finance. The loans are for up to £5 million for a maximum 6-year term.

The Government will guarantee 80% of each loan. The lender will otherwise treat the balance as a standard loan and so their usual rigour on financial testing and collateral value will therefore apply. This means that many businesses may not have assets to offer as security. If you are looking to this Loan Scheme, directors may be asked to provide personal guarantees and mortgages over your personal property.

In any event, company directors looking to mitigate their exposure and potential losses during any financial downturn will need to consider their fiduciary duties and personal obligations, as well as the application of insolvency laws in the UK which have the ability to set aside certain transactions which qualify under those laws as a preference or as a transaction at undervalue.

5   Director Duties re Insolvency:

On 27 March 2020, the government announced that there would be new measures to relax wrongful trading laws for directors during the pandemic. The change aims to allow directors to pay staff and suppliers in certain circumstances without the fear of becoming personally liable to contribute to the assets of the business, even if there are concerns the company could be or become insolvent.

Existing laws for fraudulent trading and the threat of director disqualification will remain in force.

Although it is unclear when the legislation will be put forward, once passed, it will apply retrospectively from 1 March and continue for three months from then. It should be noted that the current announcement is very light on detail at the moment, so this is one to watch.

We are committed to supporting our clients and the art sector as a whole at this difficult time.  If you would like to discuss any of the points noted above or have any other questions, please do not hesitate to get in touch with Sarah Barker, our Head of Art Group.

Read about our Art Group sector experience.