With insolvency it seems the numbers don’t lie, but are contractor companies already past the worst of it?

It might not surprise hard-nosed contractors working tirelessly at the coalface of a sector still getting used to IR35 reform, but the number of company insolvencies has risen sharply from 1,517 to 2,114. And so the question is, writes licensed insolvency practitioner Matt Fox, director of Beacon LLP, should contractors be worried?

Released by the Insolvency Service, the figures show that insolvencies have more than doubled on the same month a year ago – i.e. they were 999 corporate insolvencies in March 2021, a month before the off-payroll changes were introduced. Today’s total insolvency stack – 2,114, is some 34% up on the prior, pre-pandemic year.

Just like insolvencies, CVLs are more common

Also increasing are Creditors Voluntary Liquidations. In fact, last month, some 1,844 CVLs were counted by the Insolvency Service, representing over double the number in March 2021, and a hefty 62% up on 2019.

Interestingly, from the beginning of covid-19 until mid-2021, overall numbers of individual and company insolvencies were still low, when compared to pre-pandemic levels. Yet one area that did boom over that period was CVLs -- which are now much higher still.

The reason for this may be that compulsory liquidations and bankruptcies remained low due to the government measures that were put in place to support such businesses through the pandemic. This, coupled with the temporary restrictions on the use of statutory demands and winding up petitions.

But by September 30th 2021, some of the government’s covid-support measures came to an end, or they were reduced. And by March 31st 2022, all the government’s measures expired. It remains to be seen if there will now be a significant increase in bankruptcies and compulsory liquidations as a result.

What could be the causes?

Overall (and in line with what we’ve witnessed) the trend for company insolvencies started to rise from February 2021 and, it’s continuing to increase -- but with a visible spike in insolvencies from early 2022.

For many small businesses, the official funding to get through the pandemic or recover has simply not been enough to cover several months of closure, while they potentially still had to pay rent, utility and other business costs. Add to this, that those businesses including contractor limited companies which took up the government’s offer of a Bounce Back Loan, are now required to make monthly repayments. 

Generally speaking, it seems the numbers don’t lie because we have experienced a steady increase in business-owners seeking help and advice. For many of them, it seems the sectors they operate in are still in a period of recovery – even though we’re nearly in May of 2022. For those traders and others, commissions or customer orders simply are not returning to pre-pandemic levels. Yet.

The recovery that’s still in recovery

This recovery still being in recovery could be down to a number of reasons depending on which sector you operate in. But some standout factors are work from home issues; businesses altering the way they operate, and the cutting of costs to remain as efficient as possible. There are other more uncontrollable forces that are contributing to a difficult economic climate for UK limited companies, notably the runaway cost of living and the ongoing actions of Russia in the Ukraine.

Looking at the official insolvency figures for March, our reading is that while many company directors have taken advantage of government-backed loans, the ensuing funds have sometimes still not been sufficient to carry the business through this uniquely difficult period and provide the working capital needed as trade, and demand, picks up.

Time to Pay, or improving all the time?

At the time of writing, our advisers are starting to see pressure grow from HMRC. Similarly right now, landlords are requesting prompt payment and clearing any arrears.

As for HMRC, contractors can of course try to get a Time to Pay agreement – which the Revenue offers albeit only in what it believes are the ‘right’ circumstances.

But unless your business (contractor or otherwise) is improving all the time and can service its current debt, as well as the additional payments to clear arrears, without proper planning, the business is still likely to fail. Little wonder, then, that we are continuing to provide free help and support to business-owners who are worried about their company and how it might be able to survive. So contractors with concerns or in financial distress, please don’t suffer in silence but instead come forward.

An IR35 light at the end of tunnel, potentially

Very finally, there are signs that some of that potential suffering might hopefully be short-lived. Research from Qdos carried out between April to November 2021 uncovered a staggering increase of 83% in limited company contractors determined as operating correctly outside IR35. With the contractor sector’s penchant for three-month contracts which often get extended, some of those compliantly operating contractor companies should be adding to their financial reserves just about now, so that’s one in the eye for that rising tide of insolvencies which as far as one-person businesses are concerned, we may now be past the worst of.

Profile picture for user Matt Fox

Written by Matt Fox

Matt specialises in corporate and restructuring solutions with over 30-years’ experience having started his career in 1990 with Ernst & Young. He has since worked with other national firms, undertaking business restructuring in the UK and overseas. Matt later joined BDO undertaking restructuring assignments with the main clearing banks working in the property, construction and leisure sectors. Matt is now co-owner of Beacon LLP and is focused on helping SMEs.

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