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Many businesses will have entered into a Time to Pay Arrangement for their corporation tax as a result of the pandemic. At some point though, historic tax payments will overlap with new taxation liabilities.
This may create further cashflow pressure, particularly at a time when working capital also needs to be ramped up. In addition, the duplicity of taxation payments may negatively impact banking covenant tests.
When agreeing a term loan, lenders typically include a cashflow to debt service covenant. The cashflow part of this equation is likely to be calculated after taxation paid. As a result, if this includes both past and present tax liabilities, coverages could weaken.
Covenant test levels may already have been weakened by a fall in trading over recent months. Furthermore, due to their rolling nature, it is important to remember that any negative impact can take several test periods to filter through.
Cashflow forecasts are of course essential for business planning. However, by linking these forecasts with expected covenant tests, a tight or even breached covenant position can be predicted. With this knowledge lenders can be contacted early for renegotiation.
If you need help with cashflow forecasting or banking covenants, please contact our Banking Advisory team for assistance.
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