UK Business Closures Spike Before Rises in Tax and Minimum Wage

(Bloomberg) — Thousands of UK businesses filed for insolvency ahead of tax and wage increases on employers, a blow to Chancellor Rachel Reeves’ efforts to balance the struggling economy’s books. 

More than 3,700 firms filed for insolvency in the past month, according to notices filed to The Gazette, where the country’s business closures are advertised. That’s a 32% increase on the same period last year. 

Reeves is increasing both employer national insurance contributions and the minimum wage this month, potentially hurting businesses with thin margins such as retail, in an effort to bring stability to the public finances. The Labour party politician has cut expenditure, trimmed welfare and pledged to tackle tax avoidance after higher borrowing costs and a shortfall in tax receipts hurt her spending plans.

The spike in insolvencies also comes before a rise later this month in the amount of capital gains tax applied to business asset disposal relief, said Dan Booth, head of insolvency specialist Leonard Curtis. A wave of solvent company owners had already opted to wind up their companies before October’s budget to avoid the expected increase in the levy on entrepreneurs. 

Firms are contending with the “ongoing impact of inflation, falling business confidence and supply chain issues” along with higher costs and the “potential impact” of new tariffs, said Simon Edel, a partner in EY-Parthenon’s UK restructuring business. Small and medium size businesses have driven the trend, choosing to call time on their companies rather than looking at rescue options, he said. 

‘Creating Opportunities’

“The effective increase in the cost to businesses is around 10% to 15%,” said Heather Powell, a partner at business advisory firm Blick Rothenberg, referring to the higher NIC and wage costs. 

The Treasury is focused on “creating opportunities for businesses to compete and access the finance they need to scale, export and break into new markets,” a spokesperson said by email. The economy may be emerging from stagflation as a range of indicators ranging from business activity to consumer confidence improve.

Still, insolvencies are jumping again after declining from mid-November, according to figures in The Gazette, though even firms that aren’t winding down are seeking to reduce head count as labor costs bite.

In January, convenience store chain J Sainsbury Plc announced it would cut 3,000 jobs, while supermarket Tesco Plc has said that it will reduce its workforce by 400. Fellow grocer Morrisons was the latest to announce cuts, putting 365 roles at risk at the end of March.

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