A record number of UK businesses are facing major financial distress, highlighting the parlous state of the economy as Chancellor Rachel Reeves prepares to unveil her first Budget on October 30.
A report by insolvency specialists Bigbys Traynor revealed that 632,756 businesses were at high risk of failing in the three months to September – an increase of almost a third on the same period last year and a 5% increase compared to the previous period. a fourth.
The Begbies Traynor Red Flag Alert report, which tracks key financial indicators such as profit retention, interest coverage ratios and contingent liabilities, recorded the highest level of business distress since its inception two decades ago. This even exceeds the numbers seen during the global financial crisis in 2008.
Growing distress in various industries
A major factor behind the spike in corporate distress was a sharp 20% rise in the number of utility companies at risk of collapse. This comes amid warnings from credit rating agency Moody’s that major water companies, including Thames Water, could reel under increasing debt burdens unless they are allowed to raise customer bills significantly.
Retailers, especially in the food and pharmaceutical sectors, also felt the pressure, with a 10.4% increase in financial distress reported. Other sectors seeing sharp increases include financial services (9.9%) and bars and restaurants (8.7%). Of the 22 sectors tracked by Begbie-Traynor, 21 reported slightly higher levels of distress over the last quarter.
However, some regions have seen a decline in critical stress levels, the most severe form of financial distress identified in the report. Critical difficulties among businesses fell by 23% to 31,201 in the fourth quarter, down from 40,613, with notable improvements in the hotel, accommodation, construction and real estate sectors.
Impact of upcoming budget and tax increases
With Rachel Reeves expected to introduce £40bn in financial changes, including potential increases in capital gains tax and the introduction of National Insurance to employer pension contributions, fears are growing that already struggling businesses could be pushed towards collapse.
Julie Palmer, partner at Begbie Traynor, warned that Reeves’ budget could be the tipping point for many businesses. “The prospect of a change of government was seen as a potential catalyst for a much-needed boost to the economy,” Palmer said. “But there are significant concerns surrounding what the next Budget might hold for the economy, and the knock-on effect could be damaging for many businesses teetering on the brink of collapse, many of which look certain to have to contend with rising staff costs.” “Taxes.”
Separate data from the Insolvency Service released on Friday showed a slight increase in corporate insolvencies, rising 2% month-on-month to 1,973 in September, although that figure was down 7% compared to the same period last year.
Mixed business sentiment ahead of budget
Businesses are cautiously awaiting the results of the autumn budget, with many concerned that the higher tax burden could worsen already fragile economic conditions. Joe Streeten, managing director at AECOM, noted that business sentiment had weakened since the summer. “While it looks likely that businesses will have to shoulder an increased tax burden, there are hopes that the budget will also bring with it new policies to boost investment and provide more certainty around major infrastructure projects,” Streeten said.
The retail and hospitality sectors, in particular, are likely to feel the brunt of any new fiscal measures, as they were among the hardest hit by rising inflation and labor costs over the past year.
Personal insolvencies are also on the rise
Financial pressures are not limited to companies. Personal insolvencies rose by 44% over the past year, to 10,651 in September, driven largely by changes in government policy. The removal of the £90 fee required to obtain a debt relief order, a formal insolvency process designed to help individuals manage unsustainable debts, has contributed to the sharp rise in personal insolvency figures.
As the country prepares for the next budget, all eyes are on how Reeves will balance the need for fiscal responsibility with measures to encourage economic growth. With a record number of companies in distress and personal insolvencies on the rise, the risks to the Chancellor’s decisions have never been higher.