Northern Ireland firms hit by EU state aid restrictions on UK Covid loans

Struggling Northern Irish businesses risk being locked out of the UK’s new government-backed loan scheme if they fall foul of EU state aid rules that continue to apply in the region after Brexit.

Officials have warned lenders that local companies may be “ineligible” for the new scheme in the latest unexpected consequence from Britain leaving the EU.

Treasury officials are working on the final details of the government guaranteed Recovery Loan Scheme that will replace £72bn of coronavirus-related support measures from April 6.

The new scheme will be similar to the existing Coronavirus Business Interruption Loan Scheme, with 80 per cent guarantees for bank loans of up to £10m.

But its launch is shaping up to be another problem stemming from the terms of the Northern Ireland protocol, part of the Brexit deal, under which the region remains within the orbit of EU state aid rules.

Northern Irish businesses are already chafing from restrictions and red tape stemming from Brexit, including the requirement for health certificates for agrifood shipments from Great Britain to the region.

The government now faces writing separate rules for the Recovery Loan Scheme on different sides of the Irish Sea.

The complication around the new scheme stems from an EU state aid law called the “undertaking in difficulty test”.

This prohibits support being given to companies that are already in a restructuring plan, are in severe distress — for example if they have entered insolvency proceedings — or have accumulated losses greater than half of their subscribed share capital.

When CBILS was created a year ago the UK still applied the test because it had not yet left the EU state aid regime.

The Recovery Loan Scheme is being formed, at least for Great Britain, without the same undertaking in difficulty test, giving lenders greater freedom to lend to struggling companies.

People close to the process said the tests that banks must impose on borrowers will be made “simpler and easier” for British companies.

However, in Northern Ireland lenders have been told by government officials that they will still have to ensure that each loan satisfies the EU test. 

Some British companies with large Northern Irish operations could also be subject to the EU rules, according to people familiar with the situation.

Angela McGowan, Northern Ireland director for the CBI business group, said: “It’s vital that companies across the UK can access the full range of financial assistance on offer.”

Under the new scheme, the focus is no longer on saving businesses but on giving them cash to help recover from the pandemic.

This means that the terms are less generous than the “bounce back” loan programme, for example, which has helped lend more than £45bn to British companies. Borrowers face interest rates of up to 15 per cent and the imposition of personal guarantees.

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The huge sums lent to struggling businesses has raised concerns over how much will be lost through default or fraud. 

UK Finance, the banking industry body, this week issued guidelines for banks to help encourage a consistent approach to problem borrowers.

There are concerns among executives that the industry will suffer reputational damage should banks take a hard line on government-backed loan collection. The guidelines come instead of a potential central utility that had been considered to operate across the scheme for the banks.