Why a 24 per cent drop in insolvencies is not all it seems

At first glance, the Government’s new figures on insolvencies appear cheery, with the number of companies going bust over the last year down 24 per cent, from 2,293 to 1,747.

But analysts have suggested figures may have more to do with falling interest rates than the general health of the economy, in addition to warning on customer spending and business investment in the coming months.

With lower interest rates “alleviating some of the pressure” on businesses and families, they have managed to avoid the cliff-edge of insolvency, but conditions remain tough, partner at Vedderprice Trevor Wood said.

“We’ll probably see a further fall in insolvencies before the end of the year thanks to Black Friday and Christmas. The economic conditions at home will remain tricky, and the geopolitical picture is uncertain, so I strongly suspect the fall in insolvencies is a welcome, but brief blip,” Wood added.

Earlier today, business recovery specialist Begbies Traynor delivered a stark warning that the UK will see more companies facing insolvency after the changes in the Budget, as it announced a strong start to its current financial year.

May firms have blamed uncertainty ahead of the Budget for GDP growth of only 0.1 per cent in the third quarter, as well as warning that measures actually announced in the actual Budget would likely stifle rather than support growth.

Squeezed margins to add to pressure

While the Budget announced a number of measures which should help businesses – such as business rates relief of 40 per cent and a higher minimum wage, which should support discretionary spending – it also created a new tax headache for small British firms.

Labour intensive companies like those in retail and construction will see their costs significantly rise when changes to employers’ national insurance are implemented in April. Those who employ a lot of part-time workers, like retail and hospitality firms, will see costs rise even further as the wage threshold for the tax is set to fall to £5,000.

Gordon Thomson, restructuring partner at audit, tax and consulting firm RSM, said: “While retail insolvencies were flat in the lead up to the Budget, a wave of distress is expected following the Chancellor’s increase in employers’ National Insurance contributions and National Minimum Wage, due to the vast number of people employed in the industry.

“The current statistics may be the calm before the storm as additional costs put further pressure on retailers’ already-stretched margins, leading to an increased rate of insolvencies in [the first quarter of] 2025.”

The boss of pub chain Fuller’s, Michael Turner, warned last week that “the Chancellor’s actions are a direct attack on those labour-intensive industries that are the lifeblood of our economy, whilst leaving the large City institutions, that can afford to pay their share, almost completely untouched.”

“The unintended consequences of these actions will be to drive inflation higher, put pressure on wages, and will drive many businesses to the wall,” Turner said, adding that he hoped the government would “reflect on its decisions”.

Discretionary spending and consumer confidence

The second reason analysts are concerned insolvencies will rise is consumer confidence. Despite a rally this year after the election, it fell in November, immediately after the budget.

Chief business economist at S&P, Chris Williamson, said that “ongoing pressure on household finances has resulted in squeezed spending, higher debt and lower savings”.

Consumer spending is closely linked to consumer confidence – the happier people feel about the stability of their income, the more likely they are to maintain or increase spending.

Head of accountancy and business advice firm BDO, Sophie Michael, told City AM: “Consumer confidence is so key to discretionary spend… [those] retailers are going to be the hardest hit.”

“Retail has been challenged [on] so many different front fronts in terms of business rates, labour costs, inflationary pressures and ultimately consumer confidence, as to people actually wanting to spend within the sector,” she added.

“Consumers delaying spending is the last thing businesses want to hear, particularly for those firms that are already teetering on the edge,” Mark Ford, partner in the Restructuring & Recovery team at professional services firm Evelyn Partners said.

“Companies that are facing difficulties will maximise their chances of rescuing their business and saving jobs if they act sooner, rather than later.”