More businesses under financial pressure, whilst Government announces 5,000 additional tax inspectors focusing on SMEs and reducing the tax gap
After years of difficult trading for many businesses, two key statistics show that the outlook for many is worsening as we head into 2025. Plus, with the news that the Government is recruiting an extra c.5,000 tax inspectors to focus on SMEs and reduce the tax gap, our Insolvency Practitioners (IPs) expect to see pressure grow for a further increase in company insolvencies this year.
The number of Company Strike offs is at a 20 year high
The final quarter of 2024 saw 198,046 businesses struck off, as revealed by the research firm Beauhurst.
This figure was last reached in the same quarter in 2021, in the midst of the Covid Pandemic and after the 2008 Financial Crisis.
The managing director of Beauhurst, Henry Whorwood said:
“The increase in business dissolutions is largely a consequence of last year’s budget measures, combined with a difficult financing climate.”
The number of businesses in critical financial distress grew by 50% between September and December 2024
As reported by the BBC, the number of companies in critical financial distress grew by nearly 50%, from 31,201 to 46,583 between September and December 2024. After many years of difficult trading conditions, the increase in Employers’ National Insurance contribution and the rise in the minimum wage, due to be implemented in April 2025, could well be the last straw for many.
In addition, the number of businesses considered to be in significant financial distress grew by 3.5% to 654,765 over the same quarter.
HMRC to recruit 5,000 more tax investigators
This expansion was revealed in the HMRC Customer Service and Accounts report, published on 22nd January 2025. The aim of the expansion is to secure additional tax revenue of £6.5 billion by 2029/30.
This move is seen as part of a significant clampdown on the country’s 5.3 million small businesses and their owners, at a time when the increases in the minimum wage and employers’ national insurance contributions are just around the corner.
It is understood that a major driver of this policy is the need to reduce the tax gap, as HMRC faces pressure to increase revenue amid rising Government borrowing costs. The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid.
According to HMRC’s June 2024 tax gap report, small businesses now account for 60 per cent of the overall tax gap, up from 44 per cent in 2018-19 – a figure that stands at £24.1 billion.
Why could more tax inspectors increase the financial strain on some businesses?
Increased tax inspections might uncover more instances of tax non-compliance, leading to higher tax liabilities and potential financial strain for some businesses. For example:
- Discovery of Tax Liabilities: More inspections can uncover previously unreported or underreported tax liabilities. SMEs might face significant back taxes, penalties, and interest, which can strain their finances.
- Increased Compliance Costs: Preparing for and undergoing tax inspections can be costly. SMEs may need to hire specialist tax advisors to ensure compliance, adding to their operational expenses.
- Cash Flow Disruptions: If an inspection results in a large tax bill, SMEs might struggle to pay it immediately. This can disrupt their cash flow, making it difficult to meet other financial obligations like payroll, rent, and supplier payments.
- Legal and Administrative Burdens: Dealing with tax inspections can be time-consuming and stressful. The administrative burden can divert attention from core business activities, potentially impacting productivity and profitability.
- Reputational Damage: Being subject to a tax inspection can harm an SME’s reputation, especially if it results in publicised penalties or legal action. This can affect relationships with customers, suppliers, and lenders.
- Potential for Errors: Increased scrutiny might lead to the discovery of errors in tax filings. Even unintentional mistakes can result in fines and additional tax liabilities, further straining the business.
These factors combined can create a challenging environment for SMEs, potentially leading to an increase in insolvencies, at a time when trading conditions are already difficult and due to get worse.
What can under pressure businesses do?
If directors are concerned about non-compliance over tax payments, then they should talk to their accountant or a tax specialist as soon as possible.
If a business is in the critical or significant financial distress category and the directors are concerned that insolvency is looming, then the sooner they speak to Licensed Insolvency Practitioners the better.
Insolvency Practitioners can play a crucial role in helping businesses and company directors navigate serious financial challenges. They can provide early intervention and advice, help develop restructuring or recovery plans, through a Company Voluntary Arrangement or an Administration and offer guidance on compliance with legal requirements to avoid wrongful trading and other breaches of duty. By working closely with businesses, IPs can help them manage financial distress and potentially avoid insolvency and liquidation, whilst protecting the assets of the company and reducing the possibility of director disqualification.
It is essential for businesses to seek early advice and support from Insolvency Practitioners to navigate these challenges effectively. Contact us at any of our offices for an initial free of charge consultation.
