We have all seen numerous articles and tv and radio programmes covering the growth in personal insolvencies and out of control consumer credit. However for much of the last 5 years the company insolvency figures have grabbed far fewer headlines - the figures have been unspectacular.
The following graph summarises the corporate insolvency figures for the 5 years to 31 March 2010:
As you can see, the number of companies failing was relatively low, and consistently so, until 2008. A good many more companies failed in 2008 because they did not have the resources to survive any major deterioration in their turnover, margins or cash flows. At that time the banks were themselves in serious trouble and focussing on their own problems - they stopped lending and were clawing back what cash they could from anywhere, even if it meant pushing some businesses to the wall. Furthermore, HM Revenue & Customs' Business Payments Support Scheme was not put in place until very late in 2008 and only really got going in the following year, 2009. For much of 2008 companies had nowhere to turn to for cash.
So why then did the figures not continue to rise going into 2009, given that conditions in the economy had not improved and the banking sector has still not changed its attitude to new lending? The answer lies in three main main areas. Firstly, according to former government's 2009 pre-budget report , HM Revenue & Customs have admitted to having supported 160,000 businesses employing 1.2 million people, delaying payment of £4 billion in tax. The scale of HMRC support to Great British Business should not be underestimated: if only a small proportion of these had have gone to the wall, the insolvency figures would have been very different indeed. Secondly, the banks are not, generally, pulling the plug on businesses. Sure they are making things difficult for businesses by asking for more security and reducing lending, but they are trying not to put businesses into administration. Those that do fail are often falling on their own sword. The banks' approach may be as a result of pressure from the government. More likely it is because banks see managing down their exposure over time as a better option than crystallising a certain shortfall now - there are few buyers of businesses, especially those that are struggling, in the market. Thirdly, the Bank of England has through its policy of quantitive easing, pumped a huge amount of money, £200 billion, into the economy in just one year. Even allowing for some seepage of this money overseas, it makes you wonder what state the economy would have been in, and at what prices UK government debt would be trading, had this cash not been pumped in?
What does the future hold? Will insolvencies rise again or have we reached a plateau?
We know that previous recessions have seen more businesses fail as the economy comes out of a recession than as it goes into or through it - this is because businesses simply run out of cash when there are more demands on it. A good number of insolvency practitioners have built up their teams expecting to get busier. But this assumes a short, sharp, exit from recession rather than a gradual one. From where I sit I see this recession, if indeed it has 'finished' as having a long tail. I also see this recession as having far more uncertainties attaching to it than previous ones, uncertainties which could cause a deep, indeed far depper than we have already experienced, double dip. These uncertainties include: having pumped £200 billion into the economy, will or can the Bank of England pump any more money in? If it doesn't, what does this mean for government borrowing (arguably the price of which is being supported artificially by the Bank of England's quantitative easing)? Will HMRC's support continue on previous levels, and if so for how long? I have seen, over time, debt structures within ailing businesses change, to the detriment of HMRC - how long will they allow this to continue at a time of already reduced tax revenues? Will European debt woes effect our ability to maintain government spending at levels which do not throw our economy into a tailspin in the short or long term?
I hate to say this but if I had any money to wager, I'd bet on things getting much, much, worse before they then start to get any better. This is going to be a long haul, with no one, not even Insolvency Practitioners, being immune to the pain.
These are my top tips for surviving the recession:
This recession is far from over, those businesses who plan, focus their resources, reduce costs and risk, and are adaptable stand a far better chance of surviving than those who simply trust to luck. Many business however will ignore these tips and simply carry on as before hoping that working harder will get them through - doing so is trusting more to good luck than good judgement.
This article is written for directors of companies looking to enter into time to pay arrangements with HMRC.
Whatever the outcome of the election, HMRC can be expected to continue to support businesses through time to pay arrangements agreed under its Business Payment Support Scheme.
The Scheme has undoubtedly had a good measure of success, helping a good number of businesses avoid going to the wall thus far. However past experience has shown that more businesses fail in the upturn than in the actual recession itself, and it is because of this simple fact that I anticipate changes in how the scheme works going forward.
Since the start of the Scheme in 2008, many businesses have seen their creditor profile change significantly. Put another way, the risk of failure has shifted from some creditors over on to others. In many cases the lion’s share of the risk of failure has moved away from the banks and trade creditors and over on to HMRC – this is because the banks and trade suppliers have continually maintained pressure on the company to pay whereas HMRC have been asked to take up the slack.
HMRC are no soft touch, they will tinker with the scheme to try to avoid them being left holding more of the baby as and when more businesses fail – the relative ease with which they have agreed terms in the past is not to be taken as an indication of how it will be going forward. We have already seen an early indication of their intentions to tighten things up when it was announced in the recent Budget that independent business reviews would be done where HMRC exposure is significant (greater than £1m). Even by their own admission, HMRC expect the number of companies to warrant such a review to be low, and I don’t envisage HMRC will simply carry on as normal for the bulk of the businesses making up the many millions that are currently overdue.
In the meantime, let’s revisit a few of the principles that are likely to remain true going forward:
Time to pay arrangements are there to help viable businesses continue to trade through short term funding difficulties. They are not there to help businesses for which there is no future;
Timing of businesses’ communication with HMRC is key. Go to HMRC before they chase you and you are more likely to get the right decision;
What case you have and how you present it are key. You need to demonstrate a real need for HMRC giving you support, showing what steps you have taken and intend to take to deal with your problems, and providing a clear timetable for resolving them. Going to HMRC with no paperwork, with no business plan nor forecasts, yet simply asking them for support will not get you the desired result. You have to give them confidence in your knowledge, skills and control of the business. You have to be prepared to answer HMRC’s questions based on hard facts, properly thought out and documented business strategies and forecasts, including cash flows.
If you have a track record of earlier payment difficulties within this or other businesses, or you are taking out excessive drawings, you will struggle to get HMRC to support you. In the latter case, you will have to share the pain.
The key is to take the problem to HMRC early, with all the right paperwork, and be ready to answer their questions.
There are two other issues you need to bear in mind, when considering entering into time to pay arrangements:
You may be able to obtain a reduction in your tax liability by claiming a R & D Tax Credit. Here’s a link to HMRC’s website – it’s surprising what comprises research and development, and just how easy it is to claim such a refund!
If the Company should eventually fail, the Liquidator will look back at your actions at least as far back as the time you asked HMRC for time to pay and he has a range of powers to force you to contribute towards the assets of the company in certain circumstances. In the recent E D Games case, the Liquidator formulated an action against the directors arguing that the taking of an unreasonable level of extended credit from HMRC made them liable to pay monies into the company by reason of their apparent misfeasance – the directors should have called it a day earlier. Many IPs have noted this case, with interest, and have a duty to investigate your conduct and consider all ways of enhancing the assets available to creditors. It is often a good idea to take advice from an Insolvency Practitioner before you first approach HMRC – that way you not only understand all of your options but you can also assess, and try to protect yourself against, the worst case scenario of your business failing and you being asked to contribute towards its losses.