Business failures buck economic trend

Closed for business: The number of businesses going bust has gone against the economic grain, BDO claims

Lessons learned from previous downturns have helped to soften the blow to UK businesses, according to accountancy firm BDO LLP.

Its latest Industry Watch report revealed that the total number of business failures reached 26,165 in 2009, an increase of 16 per cent on 2008, and a whopping 59 per cent increase compared with pre-recession levels in 2007. But on a positive note, business failures declined since peaking in Q1 2009 - well before economic output stabilised.

Shay Bannon, head of business restructuring at BDO LLP, said: "The rise in insolvencies is certainly considerable and equates to one in 74 businesses failing in 2009.

"However, business failures reached their peak in Q1 2009 and since then we have seen a downward trend. Historically business failures are lagging indicators and continue rising well after the economy has turned. So we were surprised to see that business failures rose far less than expectations through this recession and indeed less sharply than during previous recessions."

Bannon added that usually there is a strong correlation between economic output and business failures but during the 08/09 recession that relationship seemed to have been weakened.

"Surprisingly, businesses have held up better than the economic decline would have suggested,” he added.

BDO claims a number of factors have helped to mitigate the worst of the downturn, including the "time to pay" scheme that offers struggling firms a chance to defer tax payments. This helped to avoid between 1,600 and 2,000 corporate failures.

Also, the reduction in VAT saved a further 800 to 1,050 businesses, according to BDO because of the boost to consumer spending. A further 3,600 to 4,900 business failures were also prevented due to falling mortgage and interest costs, which helped strengthen disposable income and corporate profitability.

Bannon said banks becoming more flexible had also helped, along with "more elasticity" in the labour market.

"On the whole, businesses have learned from the hard lessons of previous downturns," he said. "However, this is not the time to become complacent. With the economic recovery sluggish at the best, and the uncertainty the General Election will create, there is the need for continued support in order to avoid a second wave of business failures.

"A government of any colour must recognise that enterprise is the UK's engine room, and any increases in VAT or tax reforms that hinder UK plc's competitive lobal standing could seriously upset the apple cart."