Report shows decline in the number of business failures
BUSINESSES have managed to hold up better during the recession than previously anticipated, a report has suggested.
An Industry Watch report by accountants and business advisers BDO LLP has shown that the number of failing businesses peaked during the first quarter of 2009, but the rate has declined since.
It showed that across the UK, the total number of business failures reached 26,165 last year – an increase of 16 per cent compared to the previous year and up by 59 per cent compared to pre‐recession levels in 2007.
The insolvency rate equates to one business in 74.
Jo Wright, business restructuring partner at BDO Birmingham, said it was surprising that business failures has declined over since peaking in the first quarter of 2009 – well before economic output stabilised.
“Since then we’ve seen a downward trend. Historically business failures are lagging indicators and continue rising well after the economy has turned,” she said.
“So we were surprised to see that business failures rose far less than expectations through this recession and indeed less sharply than during previous recessions.
“Usually there is a strong correlation between economic output and business failures but during the 08/09 recession that relationship seems to have been weakened. Businesses have held up better than the economic decline would have suggested.”
The report said a number of factors worked in tandem to mitigate the worst impact on business during the downturn. These are:
Between 1,600-2,000 corporate business failures were avoided thanks to the “time to pay” scheme that offers struggling businesses the chance to defer tax payments and was refined in the March Budget;
Between 3,600-4,900 business failures were prevented due to falling mortgage and interest costs, which boosted disposable income and corporate profitability;
Between 800 and 1,050 business failures were avoided due to the impact that the reduction in VAT had on consumer spending
Ms Wright said banks’ flexibility and “elasticity” in the labour market had also helped businesses to come through the downturn.
“However, this is not the time to become complacent,” she warned.
“With the economic recovery sluggish at the best, and the uncertainty the election will certainly create, there is the need for continued support in order to avoid a second wave of business failures.
“A Government of any colour must recognise that enterprise is the UK’s engine room and so any increases in VAT or tax reforms that hinder UK plc’s competitive global standing could seriously upset the apple cart.”
