Insolvencies spike as UK inflation takes toll

The lingering economic impacts of Covid-19, geo-political change, and huge increases in inflation have pushed a growing number of firms into insolvency. According to professional services firm Mazars, without the government intervention seen during the lockdown, many more businesses will soon fall into the red.

In late 2021, the HMRC announced its overdue debt had increased to £65 billion – a record-breaking level – following the tax deferrals brought in to help businesses amid the early stages of the pandemic. As experts anticipated that the UK was entering a “period of financial recovery”, the tax office sought to push ahead with collecting this debt.

While some tax specialists expected HMRC to be willing to work with firms to pay off this debt gradually, the number of firms facing enforcement and entering insolvency proceedings rose dramatically before the turn of the year. Again, this was at a time when the economy was widely believed to be in a period of ‘recovery’.

As it has since transpired, however, the UK’s economy is not nearly as healthy as previously believed. With decades-long wage stagnation remaining in place, massive inflation further chipped away at consumer spending power. In this cost-of-living crisis – exacerbated further by the advent of war in Ukraine – demand has collapsed, and the economy now seems to be teetering on the brink of another recession. As a result of all this, the impact of HMRC’s debt recovery is having an even more demonstrable impact.

According to the latest data from consulting and auditing firm Mazars, UK company insolvencies spiralled 39% through March 2022. In that month, 2,114 businesses entered insolvency, up from 1,517 in February. This ultimately took total insolvencies in the quarter to 5,197 – the highest number in any quarter since the third of 2017.

Explaining the roots in this crisis, Mazars Partner Rebecca Dacre noted that heightened interest rates had made businesses’ debts more expensive to service – something which was likely to have “pushed some heavily indebted businesses into the red”. As a result, businesses face “the most difficult period” since the height of the coronavirus outbreak – but must face this on their own.

It added that businesses have also had to deal with “spiralling inflation”, with energy costs rising by an average of 250% in the first quarter of this year compared to the same quarter in 2021. These costs, combined with HMRC’s move to recover outstanding arrears from companies that failed to agree a Time to Pay arrangement (TTP), mean that companies are being left with few options.

Dacre commented, “This time they are having to manage without Government support. UK businesses will be hit by the ‘cost of living crisis’, just as consumers will be. With no more Government protection from their creditors, even more businesses can be expected to fail… Insolvency practitioners are now busier than they have been in a very long time.”

Worse may still be to come, too. Citing talk of “a wave of insolvencies” the UK would face when its insolvency moratorium was lifted last year, Dacre suggested, “We’re now starting to see it.”