Coping With Corporate Insolvencies

Chelsea Williams asks whether the rising cost of doing business is fuelling corporate insolvencies, and what we can do to assist struggling clients.

The cost of doing business has exponentially surged in response to a spike in labour costs fuelled by tax rises, consistently high inflation, rising energy bills and a downturn in consumer spending. With operating costs growing heavy and biting into profit margins, companies must do more to stay in the black and keep the risk of insolvency in check.

As key UK industries experience harsher trading conditions due to the weakening economy, we examine what this means for corporate insolvencies.

A heavy financial weight

The financial health of UK businesses is in gradual decline. According to the Q1 2025 Red Flag Alert report from Begbies Traynor Group, more companies were in critical financial distress in Q1 2025 (45,416 companies), compared to Q1 2024 (40,174 companies). This paints a slightly brighter picture when compared to the previous quarter (46,853 companies in Q4 2024).

Consumer-facing sectors, such as Bars and Restaurants (+31.2%) and Travel and Tourism (+25.5%), experienced the highest increase in ‘critical’ financial distress levels over the last 12 months. With key sectors already experiencing critically high financial distress levels ahead of US tariff changes, a future surge in corporate insolvencies may well be likely.

Of the 45,416 companies in critical financial distress in Q1 2025, Real Estate and Property Services (6,480), Construction (6,367) and General Retailers (3,401) represented more

than a third of companies in this category. This underlines the impact of low investor appetite, high inflation and reduced consumer spending, all of which are key contributors to sector growth.

The new cost of doing business

The foundations of a company must be robust, which means that company overheads must be checked to ensure that they remain proportionate to the business. This is particularly important as the cost of doing business substantially increases, including utility bills, loan fees and interest, mortgage and rent payments, labour costs, equipment and plant machinery hire, and universal and sector-specific US tariffs.

Utilities

The average unit price for energy is higher than pre-pandemic due to the volatility of wholesale prices and global events. According to government statistics, the average price of electricity for small businesses doubled to 31.9p per kWh and 7.5p per kWh for gas in 2023, compared to 16.5p for electricity and 3.6p for gas in 2021 (see tinyurl.com/36dvvc4z).

Borrowing

High interest rates mean that businesses must pay more to borrow funds. This covers a wide range of borrowing products, including business loans, refinancing, mortgage or rent payments, and equipment, machinery or vehicle hire.

This may deter directors from borrowing funds and investing in their businesses, staff and equipment. As announced in the Autumn Budget, HMRC is cracking down on late payments, having increased penalties and interest rates on overdue payments.

Labour costs

The cost of hiring staff is exponentially increasing as higher rates of Employers’ National Insurance Contributions and National Living Wage come into play. Businesses must factor in the rise in overheads as this may bite into profit margins without sufficient financial planning.

US tariffs

The US President Donald Trump introduced sweeping tariffs on imported foreign goods, which UK businesses will need to consider. This now includes a 10% universal tariff, and a 10% tariff on a quota of 100,00 imported UK vehicles (any cars after that will face a 27.5% tariff). The 25% tariff on aluminium and steel imports has been scrapped. The recent negotiations with the US on mitigating the impact of tariffs has resulted in a positive outcome for British businesses but this is still a situation which should be closely monitored.

While tariffs may not impact businesses directly, they may experience an indirect impact, such as through price rises passed through supply chains. US tariffs may also impact the growth plans of a business, including expanding to US markets or partnering with US suppliers.

Rising costs and judging insolvency risk

Judging insolvency risk at the same time that costs are rising includes keeping a watchful eye on the company’s balance sheet and cash flow. If company liabilities outweigh company assets on the balance sheet, this is a sign of gradually deteriorating financial health, as the company owes more than it is due. As operating costs increase, businesses may respond by taking on additional borrowing and loading on more debt to contend with higher overheads. With the current weakening state of the market, businesses may have limited options, but will need to firefight any increase in overheads to remain operational. It is crucial for businesses to plot a long-term survival strategy to remain viable and profitable.

The role of an accountant when advising insolvent clients

The company director must work in conjunction with their accountant or financial adviser to track the health of their business. This can help them to assess their exposure to financial risk, understand the severity of any issues identified and conclude whether the company has the potential to fight or must surrender. Rising costs are often the final nail in the coffin for businesses already at breaking point. With tax rises and the impact of US tariffs set to deteriorate financial health further, businesses must prepare to weather a challenging trading year ahead. We explore some of the ways an accountant can support insolvent clients:

1. Reporting on the financial health of the business: Providing an in-depth analysis of the financial health of the business can help the director to better understand how the business is faring and the level of insolvency risk to which they are exposed. This can help the director to gauge whether urgent action is required or whether restructuring support can restore business health.
2. Advising on increasing efficiency: A well-structured plan on how to increase efficiency can unlock cash used to fuel other areas of the business. This may include reviewing the operational structure of the company, maximising tax relief and structuring payments tax-efficiently.
3. Referring the director to a licensed insolvency practitioner: Forwarding the company director to a licensed insolvency practitioner can bridge access to highly rated corporate insolvency and restructuring support. The insolvency market is concentrated with a mix of corporate insolvency advisers and licensed insolvency practitioners. It is important to differentiate between the two to ensure that clients seek regulated and qualified advice. The market is rife with lead generation companies disguising themselves as insolvency experts, so it’s crucial that clients connect with reputable and trusted providers.
4. Diagnosing the problem: If the health of the business is not terminal, a range of company rescue options may be available, including company restructuring, a company voluntary arrangement, company administration or business finance.

In conclusion

Business restructuring support can flip the fortunes of a business for the better by strategically structuring the operational set-up of the company. By finetuning how the company functions, the company can operate at the height of efficiency, which means less financial wastage.

As the rising cost of doing business directly fuels corporate insolvencies, businesses must brace themselves for a further increase in overheads as tax rises and US tariffs come into effect.

 

Author bio

Chelsea Williams is an experienced debt help adviser and is often the first port of call for those contacting Scotland Liquidators.