Many small companies are about to go to the wall. Blame the government
Matthew Lynn
City columnist
It is starting to become clear that 2024 will be the year of the bankruptcy. Consultancy Begbies Traynor reports that 47,000 firms are now on the “edge of collapse”. That is 25% more than the quarter before, and the figure has been rising rapidly for the last six months. Another 569,000 firms were found to be in “significant financial distress”, a 12% rise quarter-on-quarter. That was led by construction firms, followed by those in healthcare and education, then real estate. But the pain was felt across the economy.
That is just the latest warning sign. According to the Insolvency Service, company failures rose by 17% in the year to September, hitting the highest level since 2009. In individual sectors, it is just as grim. This month, for example, the nightclub industry warned that it was “on the edge of collapse”, and pubs and restaurants are shutting down at an accelerating rate. The UK will probably end the year with many fewer businesses still trading than when it started.
It’s not the zombies suffering
Some may welcome that, reasoning that we’re finally seeing a clear out of “zombie” businesses, which will free up resources and space for faster-growing companies to emerge. There is, perhaps, an element of truth in that argument. A few businesses managed to stagger on with lots of cheap money and some government support during the pandemic, when it might have been better if they had gone under. Yet for most of the firms now running into trouble that is unfair. The majority of the casualties are small businesses that have hardly any borrowing (no one will lend them money anyway, even if they ask for it). It is not the zombies that are starting to go bust – it is smaller companies that should be completely viable. There are three culprits to blame for the coming wave of bankruptcies.
First, the huge rise in corporation tax. Chancellor Jeremy Hunt increased the tax rate for companies from 19% to 25% last year, a rise of almost a third at a single stroke. Sure, there were tax breaks at the same time that allowed companies to claim back the cost of investment in new plants and equipment. That is fine for major corporations, but most small businesses, especially those in the crucial retail, hospitality and service industries, don’t make the kind of large-scale industrial investments that
