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Monday, 21 September 2009

Insolvency numbers decline in August

The news that formal company insolvencies fell by 23% on July 2009 seems incredible given we are 5 quarters into the worst recession, some say, since the 1930's. Yes the number of failed companies rose 11% on August 2008, but these numbers are hardly consistent with deep recession.

Regular readers of this blog will know that I think the formal insolvency statistics are heavily skewed by nearly 200,000 companies using the Government's time to pay programme for VAT and PAYE, (TTP).

This programme avoids the need, perhaps temporarily for some, for liquidation or administration, as their business can survive and avoid breaching bank facilities by spreading their tax debts over up to 12 months, or even longer in some cases.

If all of these companies do survive, then the insolvency statistics, when mapped against previous recessions, may show a marked deviation from the normal peak of insolvencies after a recession.

What's more, these companies are probably not reducing employment numbers by as much as they would have to, if going through a formal insolvency. Is this having an impact on the overall unemployment numbers which are also behind the recession curve?

Without using insolvency tools it is increasingly difficult and time consuming to reduce employment numbers in a company. By postponing payments of taxes out of future cashflow, directors taking their perhaps rose tinted spectacle covered eyes of the profit and loss issues in their business. We see this every day, if the tax is not due for payment now, directors often think its not due at all! We also hear "I can afford to pay our PAYE and VAT over 6 months", on a regular basis, when in truth there has been no analysis of affordability

One could argue then, that looking at the raw statistics the TTP scheme has been a success for the Government. One wonders though if the companies using the scheme have taken enough steps to cut costs and survive an upturn when it comes. Simply spreading tax payments on a wing and a prayer basis is unlikley to suffice.

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