• Quarterly insolvency data highlights the sectors with the largest cash flow problems – including construction
  • Business insolvencies are highest for a decade, despite HMRC not currently filing winding-up petitions over unpaid VAT and taxes
  • Insolvencies are expected to rise still further with the end of restrictions on winding-up petitions

Many UK businesses are heading for a cash crunch in 2022 – with construction, retail and hospitality among the hardest-hit.

dummy Seasonally-adjusted data from the Insolvency Service shows that in the first quarter of 2022, 4,896 companies became insolvent in England and Wales - the highest quarterly total since 2012.

The sector with the highest number of failures was construction – 1,033 construction firms in England and Wales went into insolvency, around 20% of the total.

At the start of 2022, the Federation of Small Businesses (FSB) was already warning of a springtime cash drought, with FSB National Chairman Mike Cherry warning: "Small firms are facing flashpoint after flashpoint."

The construction sector seems to be among those bearing the brunt. Firms may be locked into fixed-price contracts but face higher costs for labour, energy-intensive raw materials such as steel, and ‘light-side’ products such as doors and windows.

Wholesale and retail had the second-highest number of failures, with 704 insolvencies, around 14% of the quarter’s total.

The data also shows problems in the hospitality industry. Official data indicates that just 3% of firms in England and Wales are in the accommodation and foodservice sector, yet they made up 11% of the insolvencies in the first quarter of 2022.

Manufacturers are also at heightened risk of failure. Official data says they make up 5% of businesses in England Wales, but 8% of insolvencies in the first quarter were in this sector.

In contrast, the arts and entertainment sector is weathering the storm, perhaps because some government assistance is still available. Some 2.4% of firms in England and Wales are in this sector, but they made up just 2% of insolvencies. (Scotland reports data separately, but the trends are similar.)

Insolvencies seen rising

The first quarter of 2022 was the final period in which companies enjoyed some protection from winding-up petitions under the government's COVID-19 support package, where the threshold for filing a petition was raised to £10,000 to protect firms who had temporary cash shortages.

From 1 April, 2022, the threshold returns to previous levels, meaning a creditor can serve a winding-up petition over a debt as small as £750. Many have predicted this will see a further rise in insolvencies in the coming months.

Experts say that cash flow forecasting is essential given the high level of economic uncertainty. At the start of the year, Brendan McElhinney, Head of Direct and Bank Distribution at Allianz Trade UK & Ireland, dummy talked about the springtime cash drought and said: "Effective cash flow forecasting is always good business sense. But in the current environment, it is even more essential."

Taxes and VAT: a different approach

Even though insolvencies are higher than before the pandemic, the data may understate the number of companies in trouble, because HMRC is no longer filing winding-up petitions for unpaid tax and VAT, except in exceptional cases such as fraud.

In the first three months of 2019, HMRC filed 962 winding-up petitions across the UK, more than any other organisation. However, according to data supplied to Allianz Trade by HMRC, in the first three months of 2022 it didn’t file any.

The role of trade credit insurance

A major risk for companies is dummy the insolvency domino effect, where they can be hit if another firm in the same sector collapses, even if they do not directly trade with that firm. The construction industry is particularly vulnerable to this because of the many layers of subcontracting in major projects.

The risk of a liquidity crisis is further increased by many firms trying to accelerate growth to make up for opportunities lost in the pandemic. As business activity rises, working capital is under pressure, making any customer default doubly dangerous.

Trade credit insurance generates particular value in this environment. It protects firms from customer default, subject to contract. It also facilitates growth by allowing order volumes from new, creditworthy customers to rise quickly.