Despite insolvencies being an a record low in over a decade, a large number of businesses are voluntarily closing down due to the economic uncertainty around coronavirus and fears over a possible increase in Capital Gains Tax.
According to data obtained by accountancy firm Price Bailey, 3,126 businesses voluntarily appointed liquidators in Q3 2020, a 52% increase on Q3 2019, when 2,058 businesses voluntarily appointed liquidators.
The number of voluntary liquidations in Q3 2020 represents the highest Q3 total on record.
Members’ voluntary liquidations, Q3 2014 to Q3 2020
Price Bailey says that it has seen a surge in enquiries from business owners in the past quarter looking to close down their businesses in an orderly way and take cash out.
In many cases, however, business owners are acting in haste and could take more cash via a tradesale or management buy-out.
Price Bailey points out that it has been widely speculated that Capital Gains Tax will be increased to a maximum rate of 40% as the Chancellor looks to shore up the public finances in the wake of the coronavirus pandemic.
Many businesses owners are currently eligible for Business Asset Disposal Relief (Entrepreneurs’ Relief). This reduces the amount of Capital Gains Tax they are legally required to pay when taking cash out of their businesses to 10%.
Matt Howard, partner at Price Bailey, said he’s been seeing a flood of enquiries from business owners seeking to voluntarily cease trading and cash out. “Many business owners adopted a wait-and-see approach during the early stages of the pandemic but as the crisis has worn on and the economic outlook has worsened increasing numbers are taking matters into their own hands.
“They believe they are facing a stark choice between either shutting down now and taking some money or hanging on and potentially running up losses.”
Many of these business owners are a decade or more before retirement age and their businesses are perfectly viable, he added.
Closing them down in many cases will result in job losses, which will have a knock-on effect on the wider economy. There is a large ecosystem of potential buyers with cash to spend, and many of these businesses will have built up intangible value, such as goodwill, which will be lost if they simply cease to trade.
Insolvencies are at a low, yet the trend continues
“Insolvencies in which the creditors pull the plug on businesses are at their lowest level in over a decade due to government support measures. It is therefore all the more ironic that so many business owners are voluntarily switching off the lights.”
According to Price Bailey, the mooted rise in Capital Gains Tax has spurred many business owners to accelerate plans to exit their businesses. For viable businesses, however, a members’ voluntary liquidation is often the worst option.
Historically low interest rates mean that debt is cheap for potential buyers, so a trade sale or management buy-out, are alternatives worth exploring.
“There are plenty of available buyers that are able to access cheap debt to finance acquisitions. While High Street banks are showing some reluctance to lend, alternative lenders have an appetite to finance acquisitions,” Howard explained.
“With the Autumn budget cancelled, we are unlikely to see an increase in Capital Gains Tax in the current tax year, which means that business owners have sufficient time to explore all the options alongside voluntary liquidation.”
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