Supermarket cashback highlights need for Treasury to review its Covid rescue offer

The remarkable scene last week of major supermarket chains – led by Tesco but with Morrison’s, Sainsbury’s and others following in its wake – handing back hundreds of millions of pounds of legitimately-claimed tax breaks highlights the unusually indiscriminate nature of much of Rishi Sunak’s Covid rescue package.

The Office for Budget Responsibility (OBR) estimates ^[1] that the government will spend £70bn this financial year on helping businesses to weather the coronavirus pandemic plus a further £73bn on employment support. Business support includes everything from grants and tax cuts to cheap, government-backed loans. Much of that support has been – and continues to be – available to all firms, regardless of how they have been affected by Covid.

In the early phase of the pandemic and economic shutdown, there were benefits to getting support to businesses quickly and with minimal administrative burden. But there are growing signs that substantial chunks of this money have not been well-targeted. The government must learn from experience and focus support more narrowly to avoid wasting taxpayers’ money on those who either do not need help or – worse – are submitting deliberately fraudulent claims.

There are few restrictions on the government’s business support schemes

As the Tesco events highlighted, in March the chancellor offered a business rates holiday to all retail, hospitality and leisure businesses – including those who ultimately did very well out of the lockdown. All businesses have been allowed to defer some tax payments. Government-backed loans have also been available to all, with the terms only varying by firm size. The Bounce Back Loans offered to small businesses, which have a 100% government guarantee, have been particularly light-touch, with little due diligence on borrowers’ background or longer-term viability.

In contrast, many of the business support schemes on offer in other countries are more tightly targeted. For example, in Germany the government has allowed firms to carry back losses from 2020 in order to get a refund on their 2019 tax bills. This focuses the tax cut on those businesses that were both profitable pre-Covid and making losses this year. In France and Ireland, tax cuts were offered only to those businesses that were significantly disrupted or forced to close. In Norway and Sweden, grants have been given to businesses that have experienced at least a 30% fall in turnover.

There are benefits to taking a blanket approach to business support – but these diminish with time

As well as helping to distribute the money more quickly, the UK government’s more blanket approach has at least two other advantages. First, it avoids creating perverse incentives that could undermine the effectiveness of more targeted policies. For example, limiting access only to firms who have experienced a substantial fall in turnover could create incentives for firms to artificially depress their turnover or avoid taking up opportunities to increase their revenue. Second, Treasury officials and ministers might fear that excluding some businesses will increase the volume of lobbying they get from firms and business groups who do not qualify. But these risks must be weighed against the downsides of imposing too few restrictions.

These arguments in favour of offering help to all were stronger in the early phase of the crisis, when the government was acting quickly and the dangers of poorly designed rules that might have created perverse incentives or slowed money getting out the door were greater. Nearly eight months on – and with the government having learnt a lot about what economic activity can continue, how businesses have been able to adapt and who has applied for help – it should be possible for the government to target the schemes more effectively than they were at the start.

However, few changes have been made to the schemes that offer financial support to businesses. Government-backed loans remain available on the same terms to the same range of businesses as during the first lockdown. This is despite the business department currently estimating that 35-60% of the Bounce Back Loans to small businesses will never be repaid, at a cost to the taxpayer of £25bn – which must raise questions about whether a more discerning scheme could have made better use of taxpayer money. The self-employed income support scheme was extended through this winter on exactly the same terms as in the spring, even though it has been estimated that £1.3bn of the £12.7bn that was handed out between March and August went to self-employed people who had suffered no loss of income, while around 1.6 million self-employed people failed ^[2] to qualify for any support.

The Treasury must do more to refine the support it is offering

One exception is the grants offered to businesses, where government support has adjusted and become more tailored as the months have gone on. The first wave of grants, announced in the March budget, offered a flat amount to all businesses in England in specific sectors – either £10,000 or £25,000 depending on the size of the business – with similar schemes operating in Scotland, Wales and Northern Ireland. Subsequent waves of grants, however, have been administered by local authorities, with councils given greater discretion over which businesses should receive support, allowing councils to focus help on those who are worst affected.

Failing to focus other policies more tightly on those most in need wastes taxpayer money and opens the system to abuse. The government cannot simply rely on civic-minded businesses to hand back cash that they are legally-entitled to (as Tesco and others have just done) – not least because company managers have a duty to maximise value for their shareholders. Instead, the Treasury must do more than it has so far to refine the support that remains on offer by learning from the evidence it now has on how effective schemes have been and where the money has gone.