Rising market levels of pay are becoming a severe headache for businesses, not least SMEs, with recent budget changes piling on the woe. Recruiter Adzuna says the average advertised salary stood at £39,234 in October, up 6% on last year and the highest increase since April 2021. The rate of employer National Insurance Contributions (NICs) is increasing by 1.2 percentage points to 15% from April, while the earnings threshold at which employers start paying will fall from £9,100 to £5,000.
Non-permanent or interim staff at all levels may present a solution to a huge cost concern. In the post-Covid economy, many employers are turning to the interim market for all aspects of labour, from large special projects such as transformation and restructuring, to isolated skills gaps. Independent contractors may invoice from their own companies and, if they have other ‘clients’, will avoid being seen as de facto employees. Agency workers are another possibility.
Of course, there is a wider picture to consider. More than a fifth of working-age adults in the UK are deemed not to be actively looking for work, government figures suggest. The UK’s economic inactivity rate for people aged 16 to 64 was 21.8% in July to September 2024. This is down from previous estimates, but the number of people economically inactive increased by 14,000 from October 2023 to October 2024
That means 9.7 million people aged between 16 and 64 in the UK are not in work, nor looking for a job. The figure is higher than before the pandemic, raising concerns over worker shortages affecting the UK economy.
Economically inactive people are usually outside the workforce either because they are students, have retired or are suffering from long-term illness. Work patterns and career priorities have been changed by Covid’s disruption to ‘normal’ working life. Retaining and recruiting permanent skilled staff is increasingly challenging and, regardless of motivations cited by employees, financial incentives remain the strongest tools for attracting talent and slowing staff turnover.
The main alternative is attempting to recruit from a wider pool. This applies not only to executive and skilled positions, but to the less skilled end of the workforce, where relatively cheap permanent labour is no longer readily available. Both these tightening factors in the labour market have added to a wage spiral and have been compounded by the effects of Brexit on labour supply at all levels. The potential for valuable working capital to be impacted adversely by recruitment issues is very real.
Whether hiring interim, casual, freelance, agency staff or consultants, SMEs must be aware of all relevant tax and legal issues for flexible employment, particularly with respect to staff transferred to flexible hours contracts. While the prospect of short term cost savings may appear very appealing, particularly while interim rates remain competitive, the potential for incorrect compliance and lack of business continuity may lead managers to review staffing needs more carefully. Businesses should take appropriate professional advice on navigating this maze and its effects on cashflow to help optimise the benefits of flexible labour.
Landlords leave buy-to-let party earlier than planned
Despite rental demand outstripping supply, the present exodus of UK landlords from the residential sector is expected to accelerate, with research suggesting almost half (47%) of market participants have either sold properties or expect to do so over the next 12 months.
Lettings technology group Goodlord & Vouch found that found that 30% of landlords surveyed had either sold or marketed at least one of their rental properties in the past year. A further 17.4% were considering shrinking their portfolio in the coming year.
Landlords have blamed legislation, such as the Renters’ Rights Bill and new rules around energy efficiency standards for wanting to leaving the sector. Increased tenant arrears and unfavourable tax changes are also driving the will to sell. Yet the average number of applicants is still around 10 people for each available property. In September 2024, average UK rents were 8.4% higher than in the same month the previous year and 0.7% higher than in August 2024.
Mortgage costs have increased by twice the level of earnings growth in the last 25 years, pushing rental demand sky high; for landlords, however, an end to the period of relatively cheap mortgages following the 2008 financial crisis has killed the long buy-to-let boom. The number of landlord mortgages with arrears of at least 2.5 per cent rose by more than 50% year-on-year in Q2 2024, according to banking trade body UK Finance.
From next year anyone receiving dividends of more than £500 from buy-to-let activities, including many landlords who have incorporated, will pay tax on them at a rate depending on how much other income they receive. Overall, profit margins have shrunk steadily for most; others are already in the red. The only certainty is that further base rate – and therefore mortgage rate – cuts will be delayed while inflation remains stubbornly above the Bank of England’s target, chiefly driven by higher energy costs. Debt-laden landlords considering unwinding residential portfolios and company structures should seek early professional advice for a managed process with an optimal outcome.
UK services sector
A slowdown in the UK service sector may not sound worrying compared to more industries with a tangible, physical output. The problem is services account for 81% of GDP and 83% of employment. Moreover, a random collection of activities spanning financial services, retail, hospitality, transport and much else, the ‘sector’ grew by only 0.1% in Q3 this year, beaten by a lately troubled construction industry which grew by 0.8%.
Analysts blame delays in corporate spending on business-to-business services (a number of which were seen as non-essential when push came to shove) ahead of the new government’s first budget at the end of October. The service providers themselves say they’ve been hit by higher wages and the rising cost of bought-in goods. The UK Purchasing Managers Index (PMI) for November was 50.0 against an expected 52.0. Anything above 50 indicates a positive change.
Once again, the most stable segment of UK services has been large scale professional consulting, such as accounting and law. Even so, job cuts and scaled-back graduate schemes in the professional services sector are well documented over recent months. Many large firms are scrambling to preserve their profit margins against a background of client demand that is still lower overall.
The new government has pledged specific measures to support and boost UK financial services, including a fresh look at regulation. London’s position as a leading global financial centre cannot be taken for granted. Navigating a new maze of rules may help corporate demand for professional services, but the disparate remainder of consulting based businesses, often SMEs, may continue to find their markets tough going. Their challenges are somewhat different: relatively low levels of borrowing; disproportionately high staff and office costs; a highly competitive market for income-generating senior practitioners; and client relationships that are often too closely linked to individuals, rather than to the firm itself.
SMEs at this end of the business services are just as capable as ‘old economy’ companies of getting into serious difficulties. Some problems are obvious, but remain unaddressed year after year: poor business development skills among practitioners who don’t like selling; little or no formal mentoring or coaching; poor succession planning; unexecuted marketing plans. Ironically, these may even be some of the issues for which stricken services firms offer advice. The road to failure is then signposted by flaky or unenforceable contracts – if there are any at all – and metrics for success that are all too vague. These quickly translate into slow paying clients, poor cash flow and bad debts, usually with no asset backing in the business.
Directing while bankrupt
Unsurprisingly, an individual’s bankruptcy limits his or her involvement in running a company. A bankruptcy order against Hasan Nawaz Sharif, the son of former Prime Minister of Pakistan, Nawaz Sharif, was issued in April this year after a petition brought by HMRC, sparking media reports only this month asking why he was still a director of a number of UK registered companies.
It is unclear whether court approval was granted for Mr Sharif to act as a director or serve in a managing role ahead of discharge from bankruptcy in April 2025. Nonetheless, it is worth considering the consequences of non-compliance and the process for gaining permission.
Acting as a director without court approval is a criminal offence which risks up to two years in prison and an unlimited fine. The unauthorised director may be personally liable for certain debts of the company. Even if the bankrupt is not a registered director, ‘management’ is identified if the individual is involved in activities normally carried out by a manager.
Obtaining approval is not easy. A formal application must be submitted to the court, supported by a detailed and specific witness statement. The trustee in bankruptcy must be notified within the correct time limits and the Official Receiver is required to prepare a report. A separate court hearing will them determine whether the bankrupt acting as a director or manager of a company would be against the public interest, depending on the exact role proposed and the level of supervision by other officers. The individual may be required to give undertakings to the court and any income received could become the subject of an income payments order.
In any event, company directors facing bankruptcy are urged to take professional advice as early as possible in the process to establish the impact on their businesses and scope for continued involvement.
As ever, the Buchler Phillips approach to business challenges is ‘workout, not bail out’. Don’t hesitate to get in touch for an exploratory chat if your business needs help. Addressing the cracks now will, in many cases, avoid the need to start again.
Our helplines below are open for free initial consultations.
Jo Milner 07990 816904
David Buchler 07836 777748
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About Buchler Phillips
Buchler Phillips is an independent, UK based corporate recovery and restructuring firm, with an impeccable Mayfair heritage dating back to the 1930s.
Led by David Buchler, former Europe and Africa chairman of global consultancy Kroll Inc, our senior team is equally comfortable advising large corporations, Small & Medium Enterprises (SMEs) or individuals. In addition to decades of experience, each of our Partners brings to any given assignment unique independent insight, free from conflicts of interest, that is often sought but rarely found by clients or co-advisors.
The firm is sector-agnostic, but has particularly strong credentials in property; financial services; professional services; leisure and hospitality; retail and consumer; UK sports; media and entertainment; transport and logistics; manufacturing and engineering; technology and telecoms
Our activities fall broadly, though by no means exclusively, into financial restructuring, including fraud and forensic investigations; operational restructuring and turnaround; expert witness services and recovery solutions for corporates and individuals.
This newsletter is published for the purposes of general information only and does not constitute advice. Any action taken by readers upon the information above is entirely at their own risk.