Interesting times ahead?

Rising inflation raises concerns over interest rates

The UK Consumer Price Index annual rate of inflation rose to 4.5% in April 2011, its highest level since October 2008, according to figures released today. This has led to speculation that the Bank of England may raise interest rates in the coming months, causing more problems for struggling businesses.

A survey carried out by R3 found that many business owners are predicting that any rise in interest rates will have a serious impact on their business, with 7% of small business owners believing that they are likely to become insolvent if interest rates rise to between 2% and 3.5%. If rates climb to between 4% and 5%, the number of businesses at risk increases to 18%. The base rate was 5% in 2007.

The Office for National Statistics reported that inflation rose to 4.4% in February 2011, followed by a slight fall to 4% in March before increasing to 4.5% in April, way above the Bank of England’s target of 2%, which is likely to put pressure on the Monetary Policy Committee to increase rates.

Many commentators have suggested that historically low interest rates have helped to keep the number of business failures artificially low in recent months as debt interest payments are tied to the base rate for many businesses. However any increase in the cost of borrowing is likely to have an adverse effect on cash flow and may be the last straw for many ailing businesses.

Consumers will also feel the impact of any rise in interest rates as the cost of mortgages increases. An increase of two percentage points, whilst still low in historic terms, would add £166 per month to the cost of a £100,000 mortgage.

Rising prices put additional pressure on businesses and individuals, and increasing costs are likely to damage any fragile signs of recovery, adding to the finacial problems of many.

Moorhead Savage has the expertise and experience to help sort out financial problems - even when things seem bleak. For a free, no obligation consultation and an unbiased summary of which solutions are right for you, call Paul Moorhead today on 01709 331300. It's always good to talk.

Good news!

Sound advice saves jobs

Advice from Moorhead Savage has helped to save around 50 jobs in the Sheffield City Region in the first quarter of 2011.

Three companies working in hospitality, construction and manufacturing, approached us at the start of the New Year convinced that they were facing bankruptcy and closure.

But we were able to explain to them that steps could be taken that would save them from closure and their workforce for unemployment.

Last year Government figures suggested there were fewer smaller businesses going into liquidation but we knew than many were hanging on and hoping for good things at the start of 2011.When the better times failed to materialise, these companies approached us, fearing they were on the brink of closure, with a future that looked simply too bleak.

But in all three cases, the business owners didn’t have any awareness of the options that were available to help turn their businesses around.

The answer in all three cases was a Company Voluntary Arrangement (CVA), an insolvency procedure that allows a financially troubled company to reach a binding agreement with its creditors about payment of all, or part of, its debts over an agreed period of time.

It was good to be able to explain to all three companies that there are ways of keep a business going with the support of creditors.

A CVA can be the key to giving the best possible outcome for everybody involved because it is nearly always in the best interest of everybody, including creditors, if a business can continue to operate. If a company were simply to go down, the assets would probably not pay the creditors or make an meaningful impact on the debt. Even more importantly, by helping these companies to enter into CVAs, we were able to help safeguard 50 jobs which, in a climate like this, has to be the best news of all.

For advice on all financial problems call the team at Moorhead Savage on 01709 331 300.

Net property borrowing falls further

Homeowners' equity increases (but only because they are paying down debt)

UK homeowners repaid a record £7 billion in the final quarter of 2010 according to figures released today by the Bank of England. This is the eleventh quarter in a row that net property debts have decreased and the highest net repayment since records began in 1970.

It is likely that the reduction in debt is a result of more stringent lending policies by lenders who have been shaken by the banking meltdown in recent years. In addition a number of secured lenders have pulled out of the market all together as house prices  have plummeted, wiping out equity a d leaving many homeowners (and lenders) highly geared and dangerously exposed.
   
It seems clear that lax lending policies had a direct and devastating impact on the financial markets and the previous unsustainably high levels of lending have now been scaled back. But it also appears that consumers are not in a position to increase borrowing in order to take advantage of the lowest base rates in 315 years, which is an ominous development for high street spending and house prices in the coming months.

The challenge for banks is to ensure that the pendulum does not swing too far the other way, denying sensible levels of credit to responsible borrowers. A competitive market for sensible levels of credit is essential in a fully functioning free market economy, fostering enterprise and wealth creation. But anecdotal evidence suggests that the over-correction is in full swing.

Missed the tax deadline? It isn't the end of the world but act quickly

£90m penalties windfall for HMRC for late tax payments and tax returns

If you have missed the 31 January deadline for filing your Self Assessment Tax return, you are in good company. You are one of 9 million people who has yet to file their tax return for 2010-11. HM Revenue and Customs are looking forward to collecting around £90m in penalty fees from people who have filed their self assessment tax returns and/or paid the tax due after the 31 January deadline.

But don't be disheartened  - act quickly and you can avoid the situation getting any worse. The penalties charged by HMRC for late filed returns and late payments of tax rise as the delay increases, so if it's simply a question of an oversight, get it in ASAP and you'll save yourself some hard-earned cash.

And the good news is that if you have a 'reasonable excuse' for missing the deadline then you won't have to pay any penalty. But the bad news is that HMRC is unlikely to consider excuses relating to forgetfulness, the consumption of documents by pets, or delays due to overseas excursions, to be 'reasonable.' The rather short list of examples on their website includes documents lost through theft, fire or flood that can't be replaced in time, life-threatening illness, for example a heart attack that prevents you dealing with your tax affairs and the death of a partner shortly before the deadline.

If, however, the reason for the delay is that you know that you cannot afford to pay the tax due on last year's trading, then there is good news. By filing the tax return, even if the tax is unaffordable, you are then in a position to negotiate with HMRC for a 'time to pay' agreement. As long as your returns are filed up to date and you have a reasonable record of compliance with the tax authorities, you can put forward a repayment proposal. HMRC are generally willing to discuss sensible repayment plans, particularly if you approach them at the earliest opportunity.

If tax debts are part of a wider debt problem, it may be that a Voluntary Arrangement is the answer. These come in two flavours - Individual Voluntary Arrangments (IVAs) and Company Voluntary Arrangements (CVAs) depending on whether you trade through a limited company or are a sole trader. VAs of either variety can be a good way to solve cashflow problems and HMRC have a specialist department which deals with IVAs and CVAs, so they know what to look for in a well thought through proposal.

We have lots of experience in dealing with debt problems involving HMRC, so for expert, impartial and confidential advice, call us today on 01709 331300.

What a (debt) hangover

New Year brings debt misery for millions

Six million people fear that they will not have enough money to pay their Festive bills by the end of January according to statistics published by R3, the leading insolvency trade body. This means that 10% more people will be struggling this year than in 2010.

It's all too easy to spend a bit too much over Christmas - we've all done it at some time or other. The problem is where that extra spending is the 'straw that broke the camel's back' - the additional debt that proves to be the start of serious problems. Almost everyone has debt of some description, the key thing is to ensure that it is affordable and in line with income and expenditure. The wide availability of credit, from credit cards, loans, overdrafts, store cards, car finance and so on, means that it is all too easy to run up debts that simply aren't affordable. And Christmas is a big temptation to get into debt, with unplanned spending and ill-placed but well-meaning over-indulgence in credit for presents and parties!

The increase in VAT and rises in living expenses such as food and fuel prices will add extra pressure to household budgets this year and many more people will find that they are getting behind with payments to banks, credit card companies and so on.

The good news is that there are many options for dealing with debt that has snowballed and become unmanageable. Taking advice as soon as possible will open up these options and allow youto make an informed decision. Ignoring the warning signs will only make the situation worse.

If you, or someone you know, is struggling to get by from month to month, call me on 01709 331300. We don't charge for an initial consultation, where I can outline the all the options and recommend the best route - there's no obligation and it's completely confidential.

Paul's New Year predictions

Increase in insolvencies forecast for 2011

As we say goodbye to 2010 and look forward to the start of 2011, I thought that I would give my predictions for 2011 from an insolvency point of view.

Overall, 2010 was a surprising year insofar as the overall numbers of people and companies getting into serious difficulties started to edge downwards, rather than continuing to skyrocket upwards as many had expected. My view is that there are different factors at work in relation to individuals and companies.

For the 'over-indebted consumer' there are a huge number of 'debt management companies' being set up and they are marketing themselves in increasingly effective ways to people with debt problems. There are good and bad firms amongst these organisations and the quality of the advice on offer varies wildly from one firm to another. Most of the solutions offered by these businesses are 'informal' arrangements - ie they aren't legally binding arrangements under the Insolvency Act 1986. This means that they are only lightly regulated and they don't show up on the official statistics, hence they hide the full extent of the nation's personal debt problem.

In relation to companies, whilst the headline figure of liquidations is on a downward trajectory, my view is that the numbers are artificially low because of a number of factors that are keeping terminally ill businesses going for longer than may have been the case in the aftermath of previous recessions. Firstly, interest rates are at historically low levels, aiding struggling businesses by keeping interest payments low. This, of course, cannot last and as interest rates inevitably increase, so will the number of businesses going to the wall.

Secondly, banks are in no rush to pull the rug out from under struggling businesses, as they are aware that much of their security is over valued and they will be unlikely to recover all their debts from a fire-sale. So, as long as a business can service the debt (ie pay the interest) the banks are unlikely to demand repayment and end up testing whether their security really is worth as much as the debt.

Thirdly, HM Revenue and Customs have been uncharacteristically lenient towards businesses that are struggling to pay their tax debts and a huge number of 'Time to Pay' agreements have been made, allowing companies more time to pay off any arrears. But this will not, and cannot, last for ever and there are signs that HMRC are becoming more forceful in their treatment of debtor businesses.

So, my rather gloomy prediction for the year ahead is a sharp increase in failures amongst small to medium sized companies as interest rates edge upwards and the banks and HMRC take a more robust approach to defaulting businesses. Also, bankruptcies and Debt Relief Orders will increase as further job losses occur as a result of public sector cuts. How high will these numbers go? I'm afraid that I'm not going to stick my neck out and put a definite figure on it, but I will watch with interest the official figures for the next 12 months.

But, as always, my message is a positive one: the situation is never as bleak as it may seem and by taking advice as soon as possible, there are things that can be done to rescue a business and avoid bankruptcy. If you would like to discuss the options for either yourself, or for a client, just give me a call on 01709 331300.

Plans to widen debt relief scheme

DRO eligibility to be amended

The Government today announced plans to make more people eligible for a debt relief scheme that allows individuals to write off unaffordable debt. The Debt Relief Order (DRO) was introduced in April 2009 and has been dubbed 'bankruptcy lite' - debts are written off in the same way as in bankruptcy, but the DRO is designed for people with very low value assets and little spare income after living expenses, where the full rigour of bankruptcy is unnecessarily cumbersome. Effectively, it is a way for over-indebted consumers to remove the burden of crippling debt that can never realistically be repaid. The idea is to draw a distinction between cases where debt is disputed or where the debtor may be able to repay but chooses not to, and cases where the debt is not in any doubt and nor is the fact that the debtor will never be able to repay it.

The main criteria for a DRO is debts of less than £15,000, surplus income after reasonable living expenses of less than £50 per month and total assets worth less than £300 (not including a car which may be worth up to £1,000). This makes a DRO available to a slender but statistically significant group of over-indebted individuals.

The plans unveiled today are to exempt pension plans from the asset cap. Previously, having a pension would mean that a debtor would fail the low asset requirement (assuming that the pension fund is worth more than £300.) As almost all pension policies are 'locked away' for use in retirement and aren't available for paying debts, it seems fair to exempt pensions from the equation. In addition, the Government is firmly entrenched in a policy of encouraging everyone to save for their retirement. It therefore makes sense to amend the criteria in a way which will have little effect on the likelihood of creditors recovering their debts.