January Insolvency Update

Introduction?

As we enter 2025 one can only hope that all readers have had a most enjoyable festive break, and that plans for the year ahead will reap successful rewards.

The current general economic backdrop is one of a depressing economic performance for the whole of the UK in the last five or six months of 2024, with no signs of sunshine for retailers or those in leisure/hospitality and whilst challenges lie ahead, both home and abroad, the situation could be worse.? Take interest rates as an example, the bank base rate was 0.5% in March 2009, and did not reach 1% until May 2022.? The current base rate of 4.75% must be taken in context with the almost 24 year period between October 1977 to August 2001 when it was never below 5% and peaked in October 1981 at over 15%.? That said, any worthwhile business project should not be approved if the expected return is as low as the current base rate and thus, before embarking upon a plan to grow your business, please ensure that the financial forecast anticipates a return greater than the simple ability to pay interest on any borrowed money.?

Also, keeping a sense of business perspective is important and, for example, one might think little of spending ￡50 on an enjoyable meal and moan about paying the same amount for a pair of trousers, yet it is the pair of trousers which will last for many years rather than the meal.?

Financial failure – it’s not my fault!?

The Aberdeen insolvency team act in numerous formal insolvency situations, and often deal with cases where it is possible to save all or part of a business in a turnaround situation.? Businesses experience many financial challenges and when they become insurmountable, failure of part, or all, of a business is inevitable. A combination of circumstances tend to create failure e.g. rather than one single issue. Noted below are the most common causes which, when they occur, can lead to business collapse :?

People-related reasons?

·???????? Not seeking and taking good advice.

·???????? Poor, or lack of, delegation.

·???????? Poor quality attitude.

·???????? Unreceptive to change.

·???????? Lack of effective communication.

·???????? Not understanding your business and the market in which it operates.?

Business-related reasons?

·???????? Ineffective cost control.

·???????? Customer/supplier contractual problems.

·???????? Government legislation.

·???????? Lack of timely and understandable management information.

·???????? Overtrading.

·???????? Competition and market pressure.

·???????? Insufficient investment in the business.

·???????? Diversification into non-core areas.?

Do you recognise any of these symptoms?? If so, seeking appropriate professional advice at an early stage is highly recommended. Remember : ignore difficult issues at your peril : if you do so you can’t blame anyone but yourself.??

A more comprehensive summary of people-related and business-related reasons for business failure is documented in the forthcoming January and February Press & Journal business supplements.

?Members Voluntary Liquidations after the 2024 Autumn budget?

A Members Voluntary Liquidation “MVL” is a formal process to wind-up solvent companies.? This means that distributions to shareholders are subject to Capital Gains Tax “CGT” rather than income tax, provided the HMRC anti-avoidance rules do not apply.?

Other than in certain circumstances, CGT rates are substantially lower than income tax rates in the UK.? Thus, an MVL can provide a tax efficient way of extracting funds from a company.? Further, if the company is a trading entity and the qualifying conditions for Business Asset Disposal Relief “BADR” are satisfied, gains arising from an MVL distribution are subject to CGT at 10%, subject to a lifetime limit for qualifying gains of ￡1 million.? There was intense speculation that the UK October Budget would increase CGT rates immediately as one of a number of tax-raising measures.? This resulted in a noticeable increase in the number of MVLs in the period leading up to the Budget.? The immediate pressure was elevated when the CGT rates were left untouched but for an MVL that incepts after 6 April 2025, the rate of CGT will be 14% (where BADR applies) and 18% for any MVLs incepting after 6 April 2026.? The lifetime limit for qualifying gains remains at ￡1 million.? In short, this means that for every ￡100,000 distributed, HMRC

will take an extra ￡4,000 from you in 2025/26 and ￡8,000 from 6 April 2026 onwards.?

An MVL remains a tax efficient option to extract funds from a company that is no longer required and clearly, the tax savings will be greater if the MVL is undertaken before 5 April 2025.??

Plan now and escape the extra tax charge.?

The Insolvency Service : still on the trail of bad guys?

The Insolvency Service “TIS” deals with corporate insolvencies across the UK and operates the Director Disqualification Unit.? TIS issue a regular newsletter and, in December reported :?

·???????? A Surrey director who moved ￡100,000 in fraudulent Covid loans through family bank accounts.? He was given a suspended sentence.

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·???????? A decorator who was banned from being a director and ordered to pay more than ￡100,000 in compensation after obtaining three Covid loans.

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·???????? A fireworks trader who was jailed after forging documents to pocket Covid loan monies.

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·???????? A director who was sent to prison after failing to produce accounts for a company which owed more than ￡200,000 in tax.?

What seems clear is that the ability to blame the impact of Covid-19 for everything that went wrong has faded, and TIS are taking a tougher stance against directors.?

In a Scottish context, one can see from insolvency statistics that the number of court liquidations is increasing, likely to be at least 500 across Scotland for the whole of 2024, as are creditors voluntary liquidations (likely to be over 700 for 2024).? More directors are being brought into the limelight for scrutiny by both the liquidator and TIS.?

Time will tell whether the average UK director of a business in financial trouble will begin to act more responsibly in terms of the interests of all stakeholder groups.?

?Perhaps the “bad guys” will simply carry on and hope that they avoid detection.??

Personal insolvency : mental health moratorium?

Last month the Scottish Government published a consultation document regarding a proposed mental health moratorium which would protect individuals with serious mental health problems from debt recovery action by creditors.? A mental health moratorium working group has been formed and, from reviewing the initial consultation document, it seems that an individual with mental health problems may be able to defer debt recovery action against them for as long as a qualified mental health officer attests that appropriate treatment is being provided.? One requirement would be to advise anyone from whom credit is sought that a mental health moratorium is in place.?

Currently, anyone in Scotland can sign a standard debt moratorium document which is then submitted to the Accountant in Bankruptcy (State official).? This provides protection from creditor action for a six month period.? This is designed to give individuals an opportunity to regularise their financial position without ongoing creditor pressure, and perhaps produce a plan for repayment of all, or part, of the debts.? Sometimes the level of debts are so large that a sequestration process is required, but options such as a trust deed or entry to the Debt Arrangement Scheme is possible in a controlled manner.?

As long as the rules for entry to a mental health moratorium and thereby providing a mental health crisis breathing space, are fair and properly controlled, it does not seem unreasonable that individuals in such an unfortunate position are denied an opportunity to protect themselves.??

The consultation closes in March 2025.?

Conclusion?

This Update is provided for general interest purposes and does not purport to offer definitive advice. Thank you for taking the time to read this Update and feel free to pass it to anyone who you think might be interested in reading it.

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Michael Reid