Zombie Companies are on the Rise

Rise of the zombie company

While no one was watching, the number of zombie businesses in the UK grew, and with the advent of the COVID pandemic, this has only increased.

There has been a zombie problem for some time now. They are companies that simply exist, muddling along without ever turning a profit or increasing revenue, or worse, are running at a loss and building up debts, usually with HMRC, slowly over time.

Companies like this have played a role in keeping UK productivity down, and it’s getting worse.

A think tank, Onward, report states that a range of 1-4% of companies have gone into a “zombified” state since the start of the pandemic and this percentage keeps increasing, taking the total percentage of “Zombie companies” to higher than 20%.

The repercussion of the current state of UK businesses is of concern because the effect of having a high percentage of zombified businesses is potentially detrimental to the economy.

Hence, it is safe to say that without deliberate efforts to cut down the number of zombie companies, business investments in the UK economy will decrease by £42bn every year. In turn, this will lead to increased unemployment, which will translate to the loss of over £41bn in cumulative economic growth over the next five years.

Rick Smith, Managing Director of Forbes Burton, says that “part of the problem is that petitioning to wind up these companies is a costly and lengthy process, and may not be an available option to HMRC.”

He adds that the “government could employ other methods to cut off and deal with these zombie companies if their numbers increase to a threatening amount but we don’t know what theses could be yet.”

Government measures have contributed to zombies

For many companies, the COVID-19 pandemic brought great relief from the pressure of having to find means of survival or going through insolvency, as HMRC and other creditors were prevented from taking aggressive action. Hence, these companies have not been a priority for a while and have had room to keep existing as ‘walking dead’.

Smith says that “this is detrimental to the economy because it will take an extended period to make these companies feel the pressure of change as there’s been a shift in the HMRC priority to more pressing matters.”

In part, this explains why the rate of corporate insolvencies in the first half of 2021 has not increased in the expected proportion. In truth, there is trouble ahead for many companies that have used government support, as the owners of such companies may need to source money from personal accounts to keep their companies afloat in future.

Smith added that “many of these companies have existed for more than a decade and were profitable companies; however, they do not see the point in continuing as they have built up debt due to the pandemic and are only surviving due to the measures that are in place. Once the measures are lifted life will be hard and most directors won’t want to put in personal funds.”

The changes to IR35 also caused some contracting companies to close down, and this may keep happening over the next six months as directors watch the effects of the new policy on income. This will lead to the creation of another zombie company or the directors will decide to make a change in the operation and productivity of their company.

Company directors need to plan for all scenarios

The pandemic affected a great part of the structure and function of many businesses and companies, this has caused lots of uncertainty and no one is sure what is in store for the next few months. However, insolvency practitioners advise clients to consider some restructuring options for their companies or insolvency at this time.

Smith says “that although insolvency practitioners may give advice to the client, it all comes down to what the clients believe of their company’s future and the willingness to put effort and work into making a change in the company. Insolvency practitioners can provide a wide range of options to the clients that include loan clearance and an assessment of their success rate within a time frame.”

Smith adds that the client has to “compare both sides of the scale and envisage a tip in both directions and what happens when they get prosperous and all happens according to plan, and if all goes south. Every client has to plan for all scenarios and plan on a way to move forward.”

“Many business owners have chosen to hold back and watch what happens and a number of available support options available solidify this decision.”

“And although muddling through the uncertainty of the business seems logical, it may be best for directors to employ the service of an insolvency specialist early enough to avoid irreparable damage and losses, not only to their business but to themselves.”