The latest statistics from The Insolvency Service reveal the number of companies in England and Wales entering an insolvency procedure has increased (4.2%) between October and December 2016, compared to the same period the year before. The number of companies entering insolvency increased 7.6% since the previous quarter.
Looking at the overall year of 2016, out of the 16,502 companies entering insolvency, 1,796 of these companies were ‘connected personal service companies (PSCs)’ entering liquidation in just the last quarter (please see more on this further down). Therefore we have excluded this number from the findings to illustrate the underlying trend of corporate insolvencies.
The number of companies entering creditors voluntary liquidation (CVL) in 2016 increased by 1.1% since 2015 and those placed into compulsory liquidation increased by 0.7% since the previous year.
In 2016, the number of companies entering a company voluntary arrangement (CVA) fell by 6.9% with companies entering administration dropping 3.8% since 2015.
Comparing annual quarter on quarter statistics, the number of companies in liquidation rose slightly but remained stable and in line with medium trends as did companies entering CVAs and administration.
The increase in liquidations and the fall of restructuring methods like CVAs/administrations suggests creditors like HMRC are taking a harder line with companies. There could also be what’s called ‘directors’ fatigue’ of perhaps years of the business treading water with not much growth or improvement – a reflection on the overall economy and the last few years of austerity. Directors may just want to close companies down and start again.
Referring the PSCs, the overall number of company insolvencies increased significantly due to 1,796 ‘connected personal service companies’ in the forth quarter. The government is reforming the IR35 rule from April this year relating to personal service companies and contract jobs.
How it works: companies were set up by and connected to the main limited company (let’s call them ‘the aggregator’). This was for the benefit of tax credits as each connected company (set up for each contractor or employee) would collect tax credits and the aggregator would benefit as a whole. The government reform will now stop this tax credit loophole, meaning all these connected companies would incur tax liability and debt. This has resulted in the huge number of voluntary liquidations between October and December last year. While over a thousand of connected companies have been liquidated, the main limited companies will still be trading and running business as normal.