27% of Businesses That Claimed COVID Grants Weren’t in Financial Need

A recent government report indicates that over 27% of small businesses in the UK claimed COVID-19 support grants even though they may not have been in immediate financial distress. While the program helped prevent the closure of up to 21,000 businesses by late 2022 and may have safeguarded up to 400,000 jobs, a significant proportion of recipients did not rely on the funds to remain operational, according to data from the Department for Business and Trade (DBT).

Initially launched rapidly to provide immediate relief, the program lacked rigorous need-based testing, relying instead on general eligibility criteria to target businesses assumed to be in financial jeopardy. Government data reveals that a substantial number of firms that received funds had sufficient reserves to endure the disruptions of the pandemic. According to the DBT report, analysis showed that only a quarter of recipients lacked financial reserves to weather short-term trading disruptions, raising questions about the allocation process.

The report highlights three key factors contributing to misaligned fund distribution:

1. Eligibility vs. Financial Need: The initial selection process didn’t prioritize businesses with genuine financial hardship, though improvements were made as the pandemic progressed.

2. Lack of Coordination with Other Support Schemes: Businesses accessing the grant program also benefitted from additional schemes, such as the Coronavirus Job Retention Scheme (CJRS), which was not factored into the grant disbursement, resulting in potential over-assistance.

3. Use of Funds: Although grants were predominantly used for non-wage expenses, such as rent, supplier payments, and operational costs, the DBT report suggests that in some cases, the funds may have merely postponed reopening or reduced liability accumulation, rather than securing businesses’ financial health in the short term.

The report further noted that under 5% of grants, totaling £1.1 billion, were issued in error or due to fraud, primarily caused by mistakes in claims rather than deliberate misuse. To date, only £20.9 million of misallocated funds had been recovered by May 2023. In response, plans were announced to appoint a COVID Corruption Commissioner to oversee investigations into misuse of relief funds.

The program provided significant aid to sectors such as retail and hospitality, with small businesses receiving £11.1 billion in total grants. Some firms that might have been on the path to closure before the pandemic received support, while businesses at low risk of closing also received funds, potentially misaligning resources that could have served other areas of the economy.

While the funds’ immediate impact was largely positive, supporting business continuity and job retention, the DBT recognizes the scheme’s potential economic effects. By sustaining some firms longer than they might have otherwise lasted, the report suggests there may be long-term impacts on productivity and creditors if resources had been redeployed to more viable ventures. However, the scheme played a crucial role in enabling a quicker recovery and retaining employment across key sectors, contributing to economic resilience post-pandemic.