Managing key creditors in the post-pandemic twilight zone

It may feel as though we are very much still in the midst of the Covid-19 pandemic, particularly as the Omicron variant looms over us, but from a business perspective we are in something of a post-pandemic twilight zone. Government support, which was in general quite generous and straightforward to obtain, has now ended. Organisations can no longer claim assistance through the furlough scheme or apply for loans or grants.

In fact, repayment has begun and creditors are once again able to enforce terms upon their debtors. So, with UK corporate debt soaring from £1.9 trillion in 2020 to £6.6 trillion in 2021, what does this mean for businesses who find themselves in the red?

HMRC and creditors are taking action
There has been a significant increase in corporate insolvency, with a rise of 63 per cent in October 2021 compared to the previous year. This means creditors are taking action. Pre-covid, if a company had not paid the right fees or taxes – and had no way to do so – HMRC would likely move to liquidate the company. This activity was paused during the pandemic but has now resumed.

We’ve covered the basics on how to respond to an inquiry from HMRC here, but if you are struggling to pay the bills it is best to face the issue head on. If you engage with HMRC directly, they can be quite understanding. The same is true for most creditors, often arrangements can be made which allows them to recover debts while your business keeps trading. The key is to keep talking to them and take advice from relevant experts.

Make sure you can afford new arrangements
HMRC are unlikely to agree a new arrangement with your business if they don’t believe you will keep to it. If they do, and you default on a payment, they are again less likely to consider agreeing new terms with your business.

If you enter into a new agreement – whether this is revised terms of an existing debt, or a loan from a new creditor – make sure your business can afford to keep up to date with payments.

Post-pandemic, businesses are still experiencing global supply chain issues as well as severe recruitment challenges, which all likely lead to increased fees compared to pre-pandemic. There are also changes to taxes, such as the Health and Social Care Levy, to consider. Business costs are going up, so make sure you factor this in.

And, if you can’t reach a new agreement with HMRC or other creditors, keep taking advice from your accountant on the next steps.

It could be more difficult to get credit from your bank
Banks have mostly been supportive of Government backed measures, but any further lending puts them solely at risk, so businesses may find it more difficult to borrow. If you are intending on going to your bank for finance, make sure you are totally prepared for quite intense scrutiny.

In addition to the enhanced risk, HMRC have reclaimed preferential status in liquidation, as of 1^st December 2020. If your business owes VAT or PAYE, these are usually paid as a priority, and the banks know that HMRC will be at the front of the queue if your company does become insolvent.

This means they won’t be making any rash decisions, and they may be unwilling to help if your business is deemed to pose too high of a risk.

Know what you owe your landlord
Trading premises are another big factor which could influence your company’s solvency. Lots of tenants will not have paid their landlords in almost two years. This will have provided a lifeline to many businesses, particularly if they were unable to trade during the pandemic.

Now, landlords cannot take action for arrears created during this period until March 2022, but they can impose that tenants pay their existing rent. Any rent due from 1^st October 2021 onwards is subject to your usually agreed tenancy agreement.

Again, the best thing to do is to have an open conversation with your landlord. See what agreements can be reached on when and how your rent is paid and seek advice from your accountant to help guide you through the process.

Don’t bury your head in the sand
If you’re concerned about your finances, it is best to seek advice and begin having conversations with creditors as early as possible. Many directors will only see the severity of the problem once they have someone like HMRC really enforcing the debt – often when it is too late to take action.

It can be a difficult topic to address, but know that it does not necessarily cost anything to get good, practical and timely advice. As a director, it is your responsibility to show you have proper regard for your own liability, as well as for the future viability and profitability of the company. Seeking expert advice as quickly as possible might just be the key factor in your company’s survival.

Our Business Recovery and Insolvency Team are on-hand to help your business navigate challenging circumstances. For more information, help and advice, please contact Steve Elliott.

Steve Elliott