Rising Energy Prices Threaten the Survival of Small Businesses

September 9, 2022 / Business Insolvency

The past few months have seen a marked rise in the cost of energy and other utilities, both for commercial and individual use. This increase in cost shows no sign of slowing, with energy prices set to rise by 65% this Winter, according to estimates provided by the Cornwall Institute.

Naturally, this rise in energy prices threatens the survival of small businesses, given their already tight budgets and coming so soon after the Coronavirus pandemic. Whilst the Prime Minister has said that businesses will get support, with bills capped for six months, this support will not be enough to help all companies to survive.

In this article, Clarke Bell will discuss the rise in energy prices, the financial impact it has on small businesses, and what options company directors can take to alleviate the issue.

An overview of the rising energy prices

The UK government has published the first Quarterly Energy Prices of 2022, including the figures for January-March. These figures indicate a huge increase in domestic and business electricity and gas prices compared to 2021.

These price increases are putting financial strain on domestic homes and commercial entities alike. However, small businesses are arguably suffering the most from the changes, and for some the rise in costs will be too much to handle.

The price increases show no signs of slowing down. The prices are set to rise this Winter and continue to rise into 2023. For companies already struggling, this continuous increase in energy prices, combined with the meteoric rise in inflation and cost of living crisis, is likely to be the final straw.

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What can you do in the face of rising energy prices?

If your company is buckling under the rising energy prices, it might be time to take action before the problem spirals out of control. Depending on the financial status of your company, namely whether it is insolvent or not, you have certain options at your disposal.

Also Read: What Should I Do If I Can’t Pay Corporation Tax?

Creditors’ Voluntary Liquidation

If your company is insolvent, meaning it cannot repay its debts and liabilities at the end of a twelve-month period, then a Creditors’ Voluntary Liquidation (CVL) is often the best solution.

Essentially, a CVL enables directors to liquidate their company voluntarily, realising any value retained within the company and using it to try to satisfy the company’s obligations to its creditors. The procedure is carried out by a licensed insolvency practitioner (the liquidator), who is appointed by the company’s director(s).

One of the main advantages of a CVL is the legal protections it offers. Namely, once you initiate the process, outstanding creditors can no longer take legal action against your company. This means that they cannot petition the courts to force your company into compulsory liquidation, which would potentially mean serious consequences for you and your fellow directors. Depending on your handling of the situation, consequences of a compulsory liquidation could include being disqualified as a director for up to 15 years, and personal liability for company debt.

Another notable advantage of the CVL process is that the company’s debts remaining at the end of the procedure are written off, unless a personal guarantee has been signed.

Given these advantages, you should carefully consider using a CVL to alleviate your financial problems, if the rising energy prices have made your company insolvent. For more information on Creditors’ Voluntary Liquidations, read our complete guide to the process.

Members’ Voluntary Liquidation

If your company is solvent, but the rising energy prices have considerably reduced your company’s profitability, then you might want to liquidate your company in order to enjoy the benefits of your success. The Members’ Voluntary Liquidation (MVL) procedure is often the best means of doing so. It allows directors to close their company, enabling them to reap the profits retained within.

There are two key advantages to using an MVL. Firstly, you can rely on professional assistance throughout the process, as a licensed insolvency practitioner must be appointed to place the company into liquidation. Secondly, the MVL process carries with it significant tax benefits. Under an MVL, all profits are considered Capital Gains, seeing them taxed under CGT rather than income tax. Under CGT rates, you will retain much more of your profits than if they were taxed under the much higher income tax rates. Moreover, you may be entitled to Business Asset Disposal Relief, previously known as Entrepreneurs Relief. This can reduce your CGT to 10%, with a lifetime limit of £1 million. For companies with a large reserve of retained profits, there is no better alternative.

Let Clarke Bell help you

If the rising energy prices have threatened your company, plunging it into insolvency or drastically reducing its profitability, then let Clarke Bell help you.

We have more than 28 years of experience in helping companies with the liquidation process – whether it is a CVL or an MVL – and we can do the same for you.

Our team can assist you in closing your company as efficiently as possible.

Contact us today for your free and confidential advice.