Accountancy firm Price Bailey stated that 326 hospitality and tourism businesses including hotels, restaurant and pubs, became insolvent between 1 April and 30 June 2020 – down 49% on the first quarter of 2020 when 643 companies went into insolvency.
Sector insolvencies are at the lowest level since the third quarter of 2010 when 326 businesses went bust.
Price Bailey also stated the slowing rate of insolvencies in the sector compared to the first three months of the year suggests the Government support has created ‘zombie’ companies that are likely to collapse towards the end of 2020.
These are businesses that continue to function but cannot pay off mounting debt or find cash to grow.
Significant risk
The firm added that Government measures such as the furlough scheme, loan initiatives and rent moratorium have kept companies that would have otherwise become insolvent afloat.
It predicted that as Government aid winds down many of these companies will go out of business.
What’s more, a survey by UKHospitality (UKH) in partnership with data experts CGA, found more than three quarters of hospitality businesses in the UK are at risk of insolvency within 12 months.
The UKH Business Leaders Survey found that 3% expected to become insolvent in the next year, almost one in five (18%) predicted a significant risk of insolvency, 55% said there was a slight risk and a quarter (24%) stated there was no risk.
Generous support
Discussing the number of hospitality businesses going bust, Price Bailey partner Matt Howard said: “These numbers are astonishing. We were expecting insolvencies to be subdued in hospitality and tourism but for the numbers to be equivalent to what they were a decade ago shows just how generous the Government’s support measures have been.
“There are clearly a large number of hotels, restaurant and pubs, which are effectively insolvent but have taken advantage of financial assistance provided by the Government.
“It is highly likely we will see a surge in insolvencies towards the end of the year as these support measures are withdrawn.
“The data suggest much of the money the Government has provided to prop up these ‘zombie’ businesses will not be recouped by the taxpayer.
“It raises questions about whether there should have been more due diligence to ensure financial support was going to viable businesses that are able to repay the Treasury.
“If business owners have taken loans and tax holidays knowing they would have gone bust anyway, regardless of whether there was a lockdown, we are likely to see a spike in fraud prosecutions.”
