Corporate insolvency payouts rise to five-year high

James Salmon, Director, 7/03/2019.

Corporate insolvency payouts rise to five-year high

Corporate insolvency payouts are rising as the cost of insolvencies are passed on to the Government. Taxpayers are picking up the bill for insolvent companies, with National Insurance Fund payouts to redundant staff reaching a five-year high of £298m last year. The 2018 total marks a dramatic 31% increase in corporate failure costs from 2017, driven largely by challenging conditions for pubs, restaurants and brick-and-mortar retailers, after thousands of high street stores and hospitality sites closed last year. In total, 17,439 companies in England and Wales collapsed in 2018.

According to official data, the insolvency service gave out £196.36m in redundancy pay for employees of insolvent firms, with a further £59.85m paid to cover wages lost due to the lack of a notice period. Holiday pay, overtime and unpaid wages were all also covered by the insolvency service. Insolvencies among food and beverage companies increased by 17.9% last year, whilst retail insolvencies were up by 9.5%.

Hospitality and retail firms face difficult conditions

High business rates, rising rent and wage costs, low consumer confidence and disruption from e-commerce have all been blamed for jeopardising retail and hospitality businesses in recent months. In addition, hospitality chains such as pubs have been impacted by increases to alcohol duty, which in conjunction with business rates and VAT have made cost pressures on many pubs untenable. Data from the Office for National Statistics show that over 25% of all UK pubs have closed in the last ten years, with small businesses disproportionately affected.

In the restaurant sector, major companies including Prezzo, Byron, Gourmet Burger Kitchen, Carluccio’s, Strada and Jamie’s Italian have all closed sites in a bid to cut costs, with a 24% increase in restaurant insolvencies and a 2% drop in the number of restaurants across Britain – equating to more than 10 closures each week.

Standard tax rate to pass 50%

Unfortunately for businesses, little looks set to change. Physical retailers with rent and shop floor wage costs remain at a disadvantage to online competition. Government officials have announced that the standard tax rate is set to exceed 50% for the first time this April, whilst consumer and investor confidence looks set to remain low amid a rise in personal insolvencies and the ongoing uncertainty surrounding Brexit. To avoid insolvency, businesses are advised to instate strong accounting systems to closely monitor cashflow and identify any issues as soon as possible. By giving themselves more time to mitigate risks and find funding solutions, companies will put themselves in a better position to weather a potential collapse crisis

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