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Impact of financing on audits and the change to HMRC preferred creditor status

As the fallout of Covid-19 continues, businesses are now starting to feel the consequences of the actions they took to help them through these unprecedented times.
One of the most common actions taken was to make use of the financial lifeline offered by the Government supported CBILS and bounce back loan schemes. These schemes provided a vital inflow of cash to hundreds of thousands of businesses, when cash became a highly sort-after commodity, key to any business survivability let alone continuity.

As businesses start to approach a full year of the financial impact this has brought, new challenges lurk on the horizon which are linked to those decisions, especially for audit regulated companies. A major risk this year to any audit is Going Concern or in simply terms; the ability for the company to continue trading for the foreseeable future.

For businesses and auditors this is a huge headache and exceptionally difficult to assess during times of uncertainty. Both parties must ensure that they can satisfy an increased assessment of their businesses’ Going Concern for a future which remains highly volatile.

A question you may be asking is; how does a decision to take up a new CBILS loan impact on Going Concern?

You may recall that most banks offered the original CBILS however, it was often difficult to meet all the strict criteria (which was arguably there to ensure you could repay the bank loan in the future). Subsequently, the government stepped in, once again, to underpin those loans and the banks relaxed some of their rules, given the comfort they now had from our government.

As most businesses had existing debt on their books prior to any new CBILS loan, the question becomes whether the company has the ability to repay both the new and old debt, as well as what happens if the old debt is up for renewal in the short term.

Banks may have been willing to offer a CBILS loan to businesses knowing that their risk is somewhat limited, however we are now seeing them becoming increasing restrictive and somewhat reluctant to offer new and renewal borrowing to businesses, even when such borrowing is commercially feasible.

The million dollar question any business and auditor has to ask is; what could happen if your debt falls due and you are either unable to fulfil them or equally if you can’t renew an existing facility (whether that be a loan or overdraft) on the same terms or at all, with your bank? Surely this gives rise to a major Going Concern risk?!

As we start to look to unwind those decisions and assess the impact fully, we can see many conversations happening with banks to try to obtain a level of comfort for auditors, that they remain willing to support your business for the foreseeable future and meet that Going Concern requirement.

All of which adds to the challenge directors/business owners are facing as the country emerges post Covid-19 and adding to this burden is the recent return of partial preferential status in respect of claims or monies owed to HMRC.

If you have any questions or concerns regarding the impact of financing on your next audit, please contact Alex Makinson below.

To discuss any corporate recovery or insolvency issues you may have, please contact Jeremy Oddie below.