SME Recovery Proposes Compensation Fund

09 Sep 2020 | 12.30 pm

SME Recovery Proposes Compensation Fund

State bailout for SMEs affected by Covid

09 Sep 2020 | 12.30 pm

Lobby group SME Recovery has proposed a new Small Business Resilience Compensation Fund to recapitalise SMEs affected by Covid-19 losses. Founder Derek Butler explains the rationale

Small businesses do not generate and retain sufficient profits to be able even over a couple of years to absorb a loss of the magnitude of the Covid losses. To move those businesses quickly off of emergency government cashflow life-lines, capital to rebuild reserves will be required.

The bill will not be cheap as it will only work if done at sufficient scale. Half measures will fail. It is also necessary to socialise the lion’s share of the cost over a large group of shoulders, whomsoever those belong to.

To reduce the cost, some of the losses can be left with the sector (like a deductible on an insurance policy) but not so much as to be a burden that prevents them recovering in the first place.

What are fair losses to socialise with taxpayers?

SMEs were not at fault when asked to stop or reduce trading for the general good. They are no more at fault than the employees whose loss of wage income we paid for as a society. We did not offer overdrafts to employees losing jobs to keep afloat until they got back to work. We compensated them for a fair share of the lost wages.

For traders, it is not just a loss of wages. Their business earnings disappeared in many cases but also fixed business costs continued – rent, insurance, supplier contracts, contractors like IT support, etc.

The Fund will not need to put all businesses back in the position they would have been without shutdown (full protection of profits, managing director salaries/dividends etc.) but should rather compensate for out of pocket losses from the Covid shut down or ongoing business restrictions and a small but fair income for the owner.

This means the Fund should pay for things like:
+ Fixed costs (other than salaries) which accrued during the shutdown (or depending on the sector for a reasonable period of reduced trading after the restrictions are released) and could not be mitigated, like rent, interest on bank loans. Capital repayments on bank loans can and should instead be financed with the liquidity loans above.
+ An income for the owner of the business but no more than a Covid payment would be for
other employees. It should not cover any top up payments to employees.
Less
+ Any rebates granted by suppliers or the government from accruing costs
+ Any revenue earned attributable to that period.

Importantly, all businesses will have to have taken actions to mitigate losses and no payout should occur, unless all suppliers, landlords, banks and the taxes have been paid in full.

How will it work in practice?

The Small Business Resilience Compensation Fund does not need to be a new agency. It could be staffed with a minimum of people if managed by the NTMA which can raise capital for the fund and manage cashflows.

Claims will be made and submitted with the 2020 tax returns by each business along the lines of an insurance claim with supporting documentation. The claim will be adjudicated by the Revenue Commissioners.

Once the claim has been adjudicated, the company will receive a credit for the award against the balance outstanding of any government provided liquidity and that credit will be paid to the lender. In the event the award exceeds any such borrowing they can receive a direct payment from the Fund.

Picking up the bill for the losses

The type of exceptional losses we are compensating for need to be socialized like insurance losses. A house fire can wipe out the single owner unless insurance pays and the cost is spread over all house owners when they pay their premia.

By government borrowing the capital for the fund from the EU or otherwise, we can spread the burden of recouping the payouts over a longer period of time.

The solidarity value to society of the closure measures and the value of stabilising the SME sector and jobs therein, means that we all should not object to contribute through general taxation to replenish the fund and repay the EU capital.

Recovery of the economy will help as PAYE taxes and business taxes will also go up without increases in rates. For larger business bailouts, the Fund could consider taking non-voting quasi equity positions in the business.

While we could decide to levy a universal taxation measure on business (both income tax and corporate tax) for repayment, we believe it is preferable to do that only to build up a self-insurance fund for business against any future similar event.

This would add resilience to our economy against future shocks and operate like the EU bank insurance deposit fund or even the PRSI fund which builds up funds in good times to pay for unemployment when a shock comes.

Download SME Recovery’s Budget Submission

Pic: Marc O’Sullivan

Comments are closed.