Hospitality faces ‘record insolvencies’ as businesses continue to suffer economic pain

By James McAllister

- Last updated on GMT

Hospitality faces ‘record insolvencies’ as businesses continue to suffer economic pain

Related tags Insolvency Bankruptcy Debt ukhospitality Inflation

Company insolvencies in hospitality could hit record highs this year, a legal expert has warned, as business continue to be battered by a ‘perfect storm’ of cost pressures.

According to figures provided by law firm Higgs LLP, a total of 249 hospitality companies entered insolvency in February this year – up from 175 in February 2022.

“Company insolvencies are at record levels across the board and unfortunately hospitality is high on the list,” says Lauren Hartigan-Pritchard, head of restructuring and insolvency at Higgs LLP.

“The circumstances for the rise in insolvencies varies sector-by-sector as each industry has its own challenges. We are witnessing a perfect storm of events that is making life very difficult for many businesses right across the country.

“Unless the economic picture improves, high levels of business failures are guaranteed.”

Hartigan-Pritchard’s warning comes as The Bank of England raised interest rates by 0.25% to 4.5% yesterday (11 May), its 12th consecutive increase.

Trade body UKHospitality has warned the rise means businesses repaying loans taken during the pandemic will face a significant impact to their viability, as the consistently rising rates will compound debt.

“Interest rates reaching their highest levels since 2008 will be a huge worry for hospitality businesses and could significantly impact business viability,” says Kate Nicholls, chief executive of UKHospitality.

“Hospitality was the business sector most affected by the pandemic, with a large number of businesses forced to take out loans to survive. With those loans now due, consistently rising interest rates compound debt and inflict further economic pain on venues.

“Loan repayment is not the only price pressure businesses face, with the sector now in a period of peak energy pain. Urgent action is needed from Government to bring costs down, particularly on energy, and more needs to be done to assist businesses in their pandemic debt.

“We would urge HMRC to be lenient in their demands from businesses at this point, allowing Time to Pay arrangements.”

Bracing for a ‘tsunami’

Higgs’s data is supported by testimony from chefs and restaurateurs across the industry, who are seeing customer numbers depleting as their overheads continue to rise significantly. And for many operators, the reality is becoming too much to bear.

In the last week alone, long-standing restaurants including Bully’s in Cardiff​ and Artichoke in Chester have both closed permanently, with owners for each respective business blaming rising cost pressures.

Recent data from Barclays has made for grim reading for restaurants too. Spending across the space fell 7.6% in April​, as consumers cut back their discretionary spending.

It follows a 5.6% sales drop in March.

Tony Rodd, chef patron of modern British restaurant Copper & Ink in London’s Blackheath, took to Twitter​ yesterday to warn of the storm faced by many restaurants across the sector, and what the collapse of so many businesses will mean for the wider economy.

“Many within the industry feel the Government could have done more to help and may, in fact, be behind the demise of the industry,” he wrote.

“For every £1 spent in a restaurant, the Government take around 16.7p in VAT. Obviously this can be offset against purchases, but as our main purchases in a restaurant are food and drink, there’s actually very little that we buy that we can offset with.

“For a restaurant of our style, staff costs can run at around 45% of turnover. Of that, around 17.5% is paid as PAYE and employers NI back to the Government. That’s 7.9p of every £1 turnover.

“Business rates work out at 2% of our annual turnover, so approximately 2p of every £1.

“So of every £1 you spend at a restaurant, 26.6p goes straight back to the Government.

“And remember that team of staff who have all been paid? The Government take employee's national insurance from them as well, meaning wages are taxed from both parties, so the Government has now made another 3p on the £1.

“Close a restaurant and the Government instantly lose this income, nearly 30p on the pound or for a restaurant of our size, around £390,000.”

Rodd adds that restaurant closures also have a wider impact on the economy, hitting supply chains and forcing many business to default on the Covid loans they had to take out during the pandemic when the sector was in lockdown.

He notes that a potential solution to help operators would be for the Government to reduce VAT for the sector to 10%, a long-running demand from businesses that has previously garnered support from Conservative MPs​.

“We pay £390,000 in taxes that would stop if we closed. Drop VAT to 10% and we still contribute around £280,000 in taxes and survive to pay that ongoing, and pay off our bounce back [Covid] loan. Make sense to me!”

Rodd’s comments have been shared across Twitter by members of the industry, with many chefs sharing similar thoughts in response.

Alex Claridge, chef-patron at The Wilderness restaurant in Birmingham, posted​: “There is a tsunami about to land for lots of us. 

“We have been incredibly fortunate this year and stayed super busy. As of next week, some bank holiday / May / voodoo shit means we’re quiet. I know many, many peers who have the same fears and problem. Last May was similarly the most challenging trading month of the year, but the problem is not normal trading cycles.

“The problem is that with every squeeze on both costs and guests dining out, it’s more scar tissue. On businesses that are still healing from Covid. That carry debt from that closure. And in a country that has the highest tax in Europe.

“Even a great business has a limit to how many times it can get battered before financially or emotionally it becomes unsustainable.”

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