This year’s peak of PSCs going to the wall may have passed. But creditor patience and HMRC understanding are also now things of the past.
They may not be every IT contractor’s bedtime reading.
But monthly insolvency stats by the Insolvency Service have been all over the place of late, defying even the keenest attempt to identify meaningful trends.
That erraticism, which started in the spring when the government body switched from using non-seasonally adjusted data (as it had done since dot) to seasonally-adjusted data is why this analysis of limited company closures — exclusively for ITContracting.com — uses the non-adjusted, writes Nick Hood, senior adviser at Opus Advisory Group.
August was 2024’s first month-on-month dip in failed LTDs
So, August’s national total of 2,006 limited company failures (England & Wales with Scotland and Northern Ireland combined) was the third lowest of 2024.
Similarly sounding like welcome news, those 2,006 ‘LTD’ company failures mark the second month in a row when the total pile of collapsed incorporated businesses shrunk.
And further pleasingly, that’s the first month-on-month dip in failed companies that the UK has seen in the past 12 months.
June saw 2,474 LTDs go to the wall
But before IT contractors and others pop any champagne corks, keep in mind that the worst time for limited companies so far this year was not too long ago. In fact, it was in June, as in that single month limited company closures peaked (so far this year) at 2,474.
Before I drill down into the data to reveal the real ‘look and feel’ of the incorporated business landscape, including those run by one-person directors, keep in mind a seemingly big positive.
Failures of limited companies in August 2024 were 18% down compared with August 2023.
Company closures up 37% on pre-covid
While that might tempt you to put the bubbly stuff on ice, be aware that August 2024 still saw a 37% higher rate of limited company failures than before the coronavirus pandemic (August 2019).
Looking at overall numbers for company insolvencies like this may be fascinating for us statistics nerds who specialise in insolvency and business rescue.
But both the real story and real issues lie in what is happening on the ground with the various types of insolvency.
Main types of insolvency
I’m talking here of:
- Business rescues via Administration.
- Business rescues via Creditors’ Voluntary Agreement.
…compared with:
- Business ‘burials’ through Liquidations (Creditors’ Voluntary Liquidation and Compulsory Liquidation).
The gloomy, painful truth is that Administrations and CVAs continue to languish at all-time lows, making up just 7% of insolvencies in the year to August 2024.
Before the pandemic, they were at 12% — broadly in line with the level seen every year dating back to the global financial crisis. A small increase seen earlier in 2024 in Administrations and CVAs has unfortunately not been sustained.
Top four sources of financial damage to small businesses in 2024
Rescues being few and far between is probably a reflection of the subdued low-growth, no-growth economic conditions, combined with the considerable amount of financial damage caused to small businesses by:
- the pandemic;
- Ukraine-linked supply chain disruption;
- soaring materials/input/labour costs; and
- two years of high interest rates.
Liquidation? It accounts for 93% of limited company failures
The long and short of these four damaging factors to small companies has made many businesses impossible to rescue, often despite the very best will of both company director and adviser.
Instead, Liquidation is now the route for an overwhelming 93% of limited company failures.
Within this sharp statistic from the Insolvency Service’s August update is the nub of the issue.
It’s ‘out’ with CVLs; ‘in’ with Creditor-Enforced Compulsory Liquidations
There is a clear shift away from director-initiated Creditors’ Voluntary Liquidations, and towards Creditor-Enforced Compulsory Liquidations.
This shift is not good news for any business struggling to manage its debts. And it’s a particular worry for any contractors operating through their one-person company if financial difficulty looms large.
Back before covid moved a whole heap of commercial goalposts, Compulsory Liquidations (imposed by creditors on insolvent companies through the court), made up 20% of business failures.
Further back still, before the global financial crisis, these compulsory liquidations represented a third of insolvencies.
When the government intervened to protect struggling businesses during the pandemic by severely restricting creditor enforcement action, Compulsory Liquidations plummeted.
The rise of compulsory liquidations (cont.)
Then, they represented just four per cent of insolvencies in 2021.
And they constituted a still-small 10% in 2022.
Then in 2023, something started to stir in the debt collection jungle.
Creditor action pushed 13% of failed companies into court and then it pushed them onwards over the financial cliff. Now in 2024, despite the pandemic feeling long-forgotten to some, this percentage has edged up again; it now stands at 14%.
Winding Up Petitions soaring in the current climate of creditor militantism
The precursor to Compulsory Liquidation — that’s the issuing of a Winding Up Petition (WUP) by an unpaid creditor — has soared in 2024. Between January and March 2024, WUPs were 17% higher than in Q1 2023. In April 2024, they were as much as 44% up on April 2023.
By far the largest player in this rather bleak, ongoing situation of creditor militantism is HMRC.
In fact, we are seeing the tax authority taking an increasingly hard line over tax arrears following the long period of government-prompted support (or ‘indulgence’ depending on your opinion) during the pandemic.
The no-nonsense taxman
WUPs initiated by HMRC were up by a massive 350% in 2023, compared to 2022.
The rescinding of the ban on issuing WUPs up to March 2022 (under covid restrictions) will account for some of this huge increase, but not all of it.
More and more, the bottom line from the stats — and from what we’re seeing on the ground, is that small companies are looking distressed at feeling the wrath of HMRC and its collection teams. And it’s that which is the glum, painful ‘look and feel’ of the incorporated business landscape right now.
Oh, and the age-old nemesis of tiny but incorporated traders — a chancellor’s Budget — is just around the corner.
Covid support’s long tail
It’s not just the taxman, however.
There’s another factor behind rising Compulsory Liquidations. Yet it too is painful for some.
It’s the aftermath of the widespread abuse of the covid-income support schemes which the government offered up as loans. It is also the investigation into and punishment of these abused loans, and those too are also very much an ongoing process.
TL;DR: What do August insolvency stats mean for LTD contractors?
The optimistic takeaway from the Insolvency Service’s August stats update is that, by now, the UK appears to have passed the peak of limited company failures.
However, the proactive management by personal service companies contractors of their outstanding debts must remain an absolute and active priority, especially where there are substantial arrears owed to HMRC. The era of patience and understanding by the Revenue and other militant creditors is clearly over.
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