Tag Archive | "insolvency"

How many contractor accountants went into liquidation in final quarter of 2011?

The latest company liquidation figures published by the Insolvency Service have been released.

The fourth quarter of 2011 saw a 14% increase in the number of compulsory company liquidations. 4,260 companies went into liquidation in the final quarter; 1,389 of those were compulsory. 191 companies took advantage of voluntary arrangements, 234 called in the receivers and 658 went into administration. Creditors voluntary liquidations stood at 2,871 – a quarter on quarter decrease of 5.1%, but an increase of 3.4% on the comparable quarter of 2010.

Frances Coulson, the president of R3, said time to pay arrangements from the Revenue and low interest rates have created zombie companies that are just managing to keep their heads above water. Some of these companies will eventually sink, she predicted.

She went on to say that current insolvency figures are down on previous recessions and the latest data could represent the “calm before the storm”. In order for an economic recovery to take place, some businesses must fail so that viable ones can thrive.

R3 research shows that 29% of SMEs are experiencing decreased sales volumes and will need additional support this year.

Andrew Dixon from Bibby Financial Services blamed the increase in insolvencies on the lack of available funding. Less than 33% of small business applied for funding from external sources last year, and only 4% took advantage of government run initiatives such as the Enterprise Finance Guarantee of the Business Growth Fund.

He said the latest insolvency figures show that small businesses need more effective support. Businesses are now turning to asset based funding such as invoice finance in a bid to improve their cashflow, because they do not know where else to turn.

He added that government agencies and the financial services industry should work together to develop greater awareness of the funding options available to UK businesses.

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Company insolvencies increase but personal ones decrease

The number of companies going insolvent is on the increase, something that could potentially also harm the fortunes of accountants for contractors.

Latest government statistics show a 0.1% quarter-on-quarter increase to 4,242 company insolvencies in the third quarter of this year. Whilst this increase is marginal, it is 6.5% up on the corresponding period last year when only 3,974 firms were declared insolvent.

206 firms applied for Company Voluntary Arrangements in Q3, compared to 187 in the second quarter. In the third quarter of 2010, only 159 companies chose to go down this route. Voluntary liquidations also recorded a 3.1% quarter-on-quarter increase.

Although the number of companies going into administration decreased by 22 on a quarter to quarter basis, 673 represents a rise of 31 on 2010’s Q3 figure.

Whilst company insolvencies are increasing, the number of personal insolvencies continues to decline.

In the third quarter of 2010, there were 33,935 personal insolvencies. Last quarter the figure had dropped to 30,219. Over the same period, there has also been a 31% decrease in bankruptcies.

The number of people taking out individual Voluntary Arrangements was up to 13,048, a quarter-on-quarter increase of 905.

The number of Debt Relief Orders reached an all time high of 7,257 in Q3. This represented a 7.6% increase on Q2 for the method that was introduced in April 2010.

Debt Relief Orders are for people with debts of less than £15,000 and assets of no more than £300. The Insolvency Service changed the rules this year for DROs, IVAs and bankruptcies to exclude pension pots when calculating an individual’s assets.

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HMRC gives out wrong information claims ACCA’s Roy-Chowdhury

Chas Roy-Chowdhury, the head of taxation at ACCA, claims that HMRC is giving out incorrect advice about the possibility of a refund of VAT in cases of personal insolvency.

Earlier this year, the Revenue lost a case against Paymex, a debt advice business, and as a result the supervisory role of practitioners in personal insolvency cases is now VAT exempt.

However, last month HMRC published guidance on reclaiming VAT and it contained what Roy-Chowdhury says is a “veiled threat” warning practitioners that they should not dig too deeply into the past. If an independent practitioner does not want to disturb the past, the Revenue will not do so either and it is totally up to the IP whether or not to claim a VAT refund.

Mr Roy-Chowdhury said HMRC needs to set the record straight so that IPs understand their position regarding tax. He believes the latest guidance goes against that issued by recognised professional licensing bodies in the summer.

He said the licensing forces, including CIMA, ICAEW and IPA, should unite and seek discussions to clarify the problem with the Revenue. Furthermore, he estimates that HMRC could owe hundreds of millions of pounds to insolvency practitioners in VAT refunds.

The Paymex case centred around an Individual Voluntary Arrangement and Roy-Chowdhury believes the VAT exemption could apply to insolvency procedures that work in a similar way – such as a Company Voluntary Arrangement. But, HMRC is not proactive when it comes to clarifying whether IPs with a supervisory role in corporate administrations are also exempt.

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Disqualification orders against directors continue to rise

Reynolds Porter Chamberlain LLP, the city law firm, has reported that 1,437 disqualification orders were placed on directors of companies, including the clients of contractor accountants, that had gone into insolvency last year, a 4 % increase on the number imposed in 2009.

Five years ago there were only 1,173 disqualification orders but since then 6,422 directors have found themselves disqualified. A disqualification order forbids a director of an insolvent company becoming a director or creating or promoting a limited company for anything up to 15 years.

Company insolvencies reached a peak in the third quarter of 2009 when the UK was in the middle of the economic downturn.

Jonathan Davies, a partner at RPC, commented on the results saying that a disqualification order can be career threatening for a director as the director is unable to set up or participate in the creation of a new business for such a long time.

Administrators and liquidators look to blame somebody when a company goes insolvent and company directors have felt the brunt. There was a substantial increase in insolvencies during the economic crisis and as a direct result we have witnessed this increase in disqualification orders.

The law firm also pointed out that the government has clamped down on corporate governance issues since the start of the recession and company directors should protect themselves by obtaining Directors & Officers insurance. A lot of small firms and limited company contractors forego this cover and end up paying enormous legal costs if their company is investigated.

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Are cash flow problems an excuse for late payment of taxes?

Research from SFP, a leading solvency firm, has shown that tax bills are the largest cause of insolvencies amongst SMEs. In fact 75% of insolvencies cite HMRC as the largest creditor.

This could have happened because companies taking advantage of the Revenue’s Time to Pay initiative failed to make provisions for future tax bills.

Simon Plant, a partner at SRP, said Time to Pay is a ticking time bomb that no-one wants to talk about. HMRC are now calling in their debts and companies that have not accrued for their liabilities face major problems.

He went on to say that there is an increasing trend in the number of companies that owe between £125,000 and £500,000. Recent data from HMRC shows an increase in the number of firms refused TTP arrangements and the Revenue attributes this to companies applying for repeat arrangements.

However, things could be about to change after a recent tribunal ruled that problems with cash flow did constitute a reasonable excuse for late settlement of tax liabilities.

Alan Kincaid had appealed against a Revenue decision to take away the gross payment status of his company, A K Construction. HMRC said Kincaid had fallen more than a year behind with some of his payments and therefore he did not meet its compliance test. Without gross payment status, Kincaid had to pay an automatic 20% levy on gross payments from contractors and this led to his cash flow problems.

John Walters, the presiding tribunal judge, ruled that Kincaid had done everything possible to avoid this possible and his cash flow problem was a reasonable excuse.

One of the directors at McGrigors, Heather Self, said the reasonable excuse defence has been used in VAT cases for some time but it is reasonably new in direct tax. However, we now have people with commercial experience sitting in tribunals and there is a developing trend towards taking a commercial approach when considering a reasonable excuse.

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Certain sectors see a rise in financially distressed firms

It might come as no surprise to contractor accountants to hear that the latest Begbies Traynor Red Flag report shows a 61% increase the number of financially distressed firms in the professional services sector over the past 12 months.

15,526 firms were discovered to be experiencing significant financial difficulties in the first quarter of this year compared to 9,620 in the corresponding period of 2010.

One reason for this increase is the stale corporate deals and property market, according to Begbies Traynor executive chairman, Ric Traynor. He went on to point out that professional services firms operating with a high fixed cost base find it increasingly difficult to cope with the current market conditions as revenues have failed to recover and opportunities to further cut costs have become more limited.

It’s not only professional services firms that are struggling either. Bars and restaurants fared even worse, registering a 68% increase on the Red Flag report, whilst the amount of culture & leisure firms with significant financial problems rose by 60%.

Companies with critical financial problems that are considering insolvency will be distressed to learn that even that option is to cost more. The Insolvency Service has raised the cost of filing bankruptcy proceedings and starting compulsory liquidation.

As from the 1st of June, an individual who wants to file for bankruptcy will need to pay £525, an increase of £75, whilst the charge for a creditor petitioning for a bankruptcy order will need to pay £700 instead of the current £600. Companies entering into voluntary liquidation will need to pay £1,165, a rise of £165.

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Corporate insolvency regime consultation launched

A consultation has been launched by the Insolvency Service into the Office of Fair Trading’s proposals for changes to the regime governing corporate insolvency.

The Market for Insolvency Practitioners in Corporate Insolvencies report was published last June and recommended changes to ensure creditors received the best outcome.

Edward Davey, the minister in charge of the insolvency regime, said the consultation was of great significance to anyone affected by insolvency, including accountants for contractors, as it contains proposals to set up an independent complaints body. It is an opportunity to comment on how the government can make sure unsecured creditors get a fair deal when a company goes under.

In addition to the complaints body, the consultation considers reform to the regulatory framework and amendments to the legislation concerning administration and liquidation.

Insolvency Practitioners Association chief executive, David Kerr, said he particularly welcomed the proposals to set up the new complaints body.

Philip King, from the Institute of Credit Management, also welcomed the consultation saying that any initiative that improves the outcome for unsecured creditors has to be applauded.

The president of R3, the insolvency trade body, whilst welcoming the consultation, said he thought unsecured creditors wanted to take a more active role in insolvency proceedings. He pointed out that they have the ability to influence decisions but rarely get the opportunity to engage in the process.

When a company goes under it is very unusual for there to be enough money left to pay all the unsecured creditors. This leads to frustrated unsecured creditors but does ensure that secured creditors will continue lending, he added.

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Are contractor accountants’ clients going bust?

Administrations dropped by 24% in the final quarter of 2010 compared to Q4 the year before, according to research conducted by Baker Tilly.

London and the South East of England saw a drop in corporate insolvencies of 37%, whilst in the rest of England, the drop averaged out at 14%. However, the South West of England did not fare so well. In the fourth quarter of 2009, the region recorded 29 insolvencies, but in the corresponding period last year, the figure had increase by 31%, to 38.

RSM Tenon believes that we will see corporate insolvencies increasing this year. Carl Jackson who heads the recovery team at RSM Tenon said that the 2010 figures did not give a true picture of UK businesses because the insolvency level in 2009 was abnormally high.

He also said that this year would be difficult for businesses and the UK is now facing the serious risk of a double dip recession. Several businesses are already on a knife edge and if the Bank of England’s MPC bows to pressure and increases interest rates more businesses will fold.

Sectors such as retail and hospitality, which depend on discretionary spend, will continue to struggle due to increasing inflation and the VAT rise, he added.

The problem could be further compounded by HMRC’s tougher stance on the deferment of taxes. Last year the Revenue turned down 5.8% of Time to Pay arrangements, compared to 2.7% in 2009. The Time to Pay scheme was a lifeline for many companies who struggled during the global downturn but with the banks still not lending, if HMRC really is clamping down, the future looks bleak for firms with financial difficulties.

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Can contractor accountants still recommend Time To Pay?

HMRC is making a lot less Time to Pay arrangements with businesses looking to defer tax payments than it did when the scheme was first introduced.

This could affect contractor accountants assisting clients through a bad patch, and raises the question of whether it’s worth suggesting it at all.

Figures recently released by the Revenue show that 196,200 TTP arrangements were made in the first nine months of 2009, whilst only 114,600 were agreed in the same period this year. That’s a drop of 81,600 or nearly 42%. In the first 9 months of this year, arrangements worth £1.9bn were approved, compared to the £3.4bn approved between January and September 2009.

The Revenue has doubled the amount of requests it refuses, now declining 5.2% of TTP arrangements compared to the 2.6% it refused in the corresponding period last year. In the last 2 years, 13,900 requests for Time to Pay, totalling £810 million, have been refused.

Philip White, the chief executive of Syscap, says this is clear proof that the Revenue is toughening up over deferrals of business taxation. He thinks this could possibly be the start of the TTP scheme winding up.

Figures have not been released to show the number of companies requesting repeat deferrals but the vice president of R3, Frances Coulson, said there was a considerable increase between September 2009 and early 2010. And around 67% of insolvency practitioners saw some companies with TTPs fall into insolvency at the end of last year. Insolvency practitioners are predicting that corporate insolvencies will increase next year.

Since the start of the scheme in November 2008, 371,200 Time To Pay arrangements have been made allowing businesses to defer £6.38 billion worth of tax payments.

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There’s been a welcome drop in small business insolvencies

The August Insolvency Index from Experian shows that the amount of businesses going under has reached its lowest point in over three years.

The Index dropped to 0.07 and the average financial strength rating increased by 0.27 to 81.06 over the last 12 months.

Contractor accountants will be particularly interested to learn that smaller businesses did very well. Their strength rating stands above the average at 82.22, an increase of 0.9 on the previous year.

The managing principal of pH, one of Experian’s companies said this shows just how quickly business fortunes can change. The present picture is very different from that of six months ago when insolvencies were increasing.

The figures also reveal that things in the North East improved. In June the region had the highest rate of insolvencies but by August the North East shared a rate of just 0.06% with six other regions.

This welcome news for SMEs is all the more surprising when you consider that the banks are still reluctant to lend to small businesses.

On a less positive note, research published on Monday showed that individuals living in towns situated on the coast were more likely to be declared insolvent than their inland counterparts in 2008 and 2009.

Last year in Hull, 51 out of every 10,000 adults were declared insolvent compared to just 20 per 10,000 in London whilst insolvency rates in Blackpool, Plymouth and Eastbourne were not far behind.

Despite more people taking staycations during the recession, coastal towns have never really recovered from the days when they were thriving fishing ports or shipbuilding centres. And a lot of people who live in these towns have to rely on seasonal or part-time employment so their income is more erratic then full-time employees.

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Online accountants in for a rocky ride

Contractor accountants should take note that the CBI warned recently that although the economy has been showing signs of improvement, challenges and uncertainty still lie ahead.

The comment came after the Bank of England decided to maintain the historically low interest rates at 0.5% last week.

The head of economic analysis at the CBI, Lai Wah Co, said that although the move was widely expected, there is growing disparity amongst members of the Monetary Policy Committee over the strength of the economic recovery.

GDP has increased by 1.1% in the past three months according to government figures but this is expected to slow down during the second half of 2010. The recovery is being supported by an exceptionally loose monetary policy and it may be sensible to move towards gradually withdrawing this monetary stimulus, the CBI expert remarked.

Meanwhile, the majority of the UK’s small businesses and limited company contractors have still not returned to pre-recession levels of profitability. 70% of British entrepreneurs have not seen their profits return to normal after the credit crisis, according to RSM Tenon’s Business Barometer.

9% of entrepreneurs believe they will have to wait for at least another 3 years before their business returns to normal, 20% think between 2 and 3 years and 27% say 1 to 2 years.

Over 40% of entrepreneurs have had to review their business through fears of a double dip recession and 22% think that a lack of cash flow could seriously threaten their operation in the coming 12 months.

The head of recovery at RSM Tenon said that they are expecting to see corporate insolvency levels remaining the same as over the past two years as business owners still struggle to secure additional funding.

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Credit managers predict a rise in insolvencies

Credit managers are expecting to see a rise in business insolvencies of over 10% within the next year.

Graydon UK, a commercial credit reference agency, conducted a survey which showed that 64% of credit professionals are expecting to see business failure rates in excess of 10%, and 13% of those are predicting insolvencies to exceed 20%.

Despite the prospect of increased company failures, just under 50% of the credit managers surveyed agreed that a rise in insolvencies is a price worth paying if the result leads to the future economic stability of the UK.

The MD of Graydon UK, Martin Williams, said that despite warnings from credit professionals, only a third of businesses are monitoring their clients’ public sector exposure.

The entire supply chain could be affected if a key customer or supplier, who relies heavily on government contracts, goes insolvent. HMRC has also been turning down requests under the Time to Pay scheme and 79% of credit managers say this will contribute to the rise in insolvencies.

A lot of businesses are struggling to settle other obligations and if they were expecting to defer tax liabilities they could well find themselves in serious difficulties.

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Contractors want alternatives to rate rises

There are concerns that plans to raise interest rates to 3.5% could have an adverse affect on contractors who operate as limited companies. The OECD urged the Bank of England to urgently implement such a rise at the end of May.

R3, the insolvency trade body, says that if interest rates rise by between 1.5 and 3%, 7% of SMEs believe they would become insolvent. This rises to 18% if rates are set between 4 – 5%. Interest rates are currently 0.5%; an all time low.

Increased interest rates would be a double blow for businesses that rely on consumer spending to repay their business bank account loans. Any increase in the cost of borrowing regardless of whether it’s used as working capital or to enable business growth will pile increased pressure on highly geared businesses.

Research by R3 shows that the sectors most likely to be hit by an increase are retail and hospitality. Almost 33% SMEs in those sectors believe that any interest rate rise could lead to their demise. However, small businesses operating in construction and manufacturing are more confident that they could cope.

The outlook for retailers is already looking shaky as many are expecting the Chancellor to raise the VAT rate to 20%. The BRC recently warned that 163,000 jobs would be lost over the coming four years if this change takes effect.

The chief executive of Kingfisher, Ian Cheshire, has called on the government to increase the range of products that attract VAT, rather than increasing the rate. Books, newspapers, children’s clothes and most food are currently zero-rated.

However, Justin King, the chief executive of J Sainsbury, says that such a move would harm low income families who spend a large proportion of their income on food.

With the emergency budget just two weeks away, it looks like George Osborne has some very tough decisions to make if he’s going to reduce our fiscal deficit.

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