Businesses are not out of the woods just yet
DAVID HUDSON
LONDON HEAD OF CORPORATE INSOLVENCY, BAKER TILLY
WHILE businesses fail during recessions, many also fail coming out, having spent the cash reserves during the hard times that they so crucially need when they have to grow again to serve a more confident customer base, against revitalised competition. The underlying message of Baker Tilly’s Outlook 2010 paper is that things are likely to get worse before they get better, including for many firms and businesses in the City.
There’s a widespread perception that recessions have clear beginnings and ends, yet the official definition – of GDP having stopped growing for a second successive quarter and returning to growth several quarters later – is rendered fairly useless in complex times such as these. One could take encouragement when GDP has returned to growth, lending returns are back to 2007 levels, M&A activity picks back up and we begin to have business conversations that don’t include reference to the “economic downturn”.
Yet there will be a temptation for many businesses to follow this premature confidence and neglect the survival lessons of the last two years, when for many the difficult work is about to begin. Looking back objectively at the impact of the recession to date, it should be noted that HM Revenue & Customs has played its part in helping – and continuing to help – a great number of businesses through the most difficult period.
Take HMRC’s approach to “time to pay” agreements and deferring payment for over 210,000 companies that have fallen into arrears with PAYE, National Insurance and VAT. In other instances, it may call for an Independent Business Review from a third party firm of accountants that will form the basis of efforts to help the business survive.
We have already seen that when HMRC is a key creditor it is prepared to consider an administration, as it did with Southend Football Club. It would rather consider plans to save the business than issue a winding up petition, which has the effect of the business coming to an end.
However, HMRC is getting increasingly tough on those businesses that have continued to struggle and not kept to the original payment agreements. This new-found enthusiasm is most likely related to the fact that around £3.8bn of tax to date has been tied up in deferred payment schemes and HMRC appears keen to continue to collect.
Businesses struggling with taxes would be well advised to be as open as possible with HMRC, and those businesses with agreement plans in place should ensure they have enough cash in the bank to clear the arrears. The last thing the government wants is to have deferred payments on a business that fails anyway.
So while HMRC will continue to support ailing businesses, it is unlikely to be at the level seen over the past 18 months. An election is looming and the ruling party post-election will need to get tax into the government’s coffers. While the number of “time to pay” applications is likely to rise, some repayment periods are expected to be shortened to six or even three months.
I doubt there are many businesses over the past year that haven’t wrestled with the twin problems of clients putting pressure on prices and suppliers tightening credit arrangements or reducing debtor days. So while the whole economy may be showing some signs of recovery, there is still much work to be done, and there is pain to come for the unprepared.
Businesses that teetered on the edge of failure in 2009 need to plot a clear course back to prosperity. While we can expect another tough year, the smarter surviving businesses should have learned some major lessons from the last 18 months and be stronger in the long-term as a result.
Download Baker Tilly’s Outlook 2010 – Still Crystal Ball Gazing? publication at www.bakertilly.co.uk/outlook2010