Hospitality sector battles soaring insolvencies amid economic turbulence

19 May, 2023

A legal expert has issued a warning that the hospitality sector may experience an unprecedented surge in company insolvencies this year due to a challenging combination of cost pressures.

Law firm, Higgs LLP has shared data revealing that in February 2023, the number of hospitality businesses entering insolvency reached 249, a significant increase compared to 175 in February 2022. This trend indicates the ongoing struggles faced by businesses in the industry.

Lauren Hartigan-Pritchard, head of restructuring and insolvency at Higgs LLP, said:

"Company insolvencies are at record levels across the board and unfortunately hospitality is high on the list.

The circumstances for the rise in insolvencies varies sector-by sector as each industry has its own challenges. We are witnessing a perfect storm of events that is making very difficult for many businesses right across the country.

Unless the economic picture improves, high levels of business failures are guaranteed."

UKHospitality has raised concerns about the repercussions of this rise on businesses currently repaying loans obtained during the pandemic. The ongoing upward trend in interest rates will have a substantial impact on the viability of these businesses, as it will further compound their debt burdens.

Testimonies from chefs and restaurateurs in the industry support the data provided by Higgs, highlighting a worrisome trend. As overhead costs continue to rise significantly, these individuals are witnessing a decline in customer numbers.

The burden of these increasing expenses has become overwhelming for many operators, leading to permanent closures of well-established restaurants. The owners of these establishments attribute their closures to the mounting cost pressures.

Furthermore, recent data from Barclays paints a bleak picture for the restaurant industry. In April, spending in this sector experienced a sharp decline of 7.6% as consumers reduced their discretionary spending.

This follows a 5.6% drop in sales observed in March. Tony Rodd, the chef patron of Copper & Ink, a modern British restaurant in London's Blackheath, took to Twitter to highlight the challenging situation faced by numerous restaurants in the sector and the potential ramifications for the broader economy due to the collapse of these businesses.

Rodd wrote:

"Many within the industry feel the Government take around 16.7p in VAT. Obviously this can be offset against purchases, but as our main purchases in a restaurant are food and drink, there's actually very little that we buy that we can offset with.

For a restaurant of our style, staff costs can run around 45% of turnover. Of that, around 17.5% is paid as PAYE ans employers NI back tot he Government. That's 7.9p of every £1 turnover.

Business rates work out at 2% of our annual turnover, so approximately 2p of every £1.

So of every £1 you spend at a restaurant, 26.6p goes straight back to the Government.

And remember that team of staff who have all been paid? The Government take employees' national insurance from them as well, meaning wages are taxed from both parties, so the Government has now made another 3p on the £1.

Close a restaurant and the Government instantly lose this income, nearly 30p on the pound or for a restaurant of our size, around £390,000."

Rodd emphasises that the closure of restaurants has far-reaching consequences for the economy, affecting supply chains and leading many businesses to default on the Covid loans they obtained during the pandemic, when the sector was under lockdown.

To support operators in this challenging situation, Rodd suggests a potential solution: a reduction in VAT for the sector to 10%. This has been a longstanding demand from businesses and has previously received support from Conservative MPs.

Rodd added to his Twitter post:

"We pay £390,000 in taxes that would stop if we closed. Drop VAT to 10% and we still contribute around £280,000 in taxes and survive to pay that ongoing, and pay off our bounce back [Covid] loan. Makes sense to me!"

Rodd's remarks have gained significant traction on Twitter, resonating with members of the industry. Many chefs have expressed similar sentiments and shared their thoughts in response to his comments.

The widespread engagement highlights the collective concern and shared experiences within the culinary community regarding the challenges faced by restaurants and the impact on their livelihoods.

Alex Claridge, chef-patron at The Wilderness restaurant in Birmingham, posted:

"We have been incredibly fortunate this year and stayed super busy. As of next week, come bank holiday / May means we're quiet. I know many, many peers who have the same fears and problem. Last May was similarly the most challenging trading month of the year, but the problem is not normal trading cycles.

The problem is that with every squeeze on both costs and guests dining out, it's more scar tissue - on businesses that are still healing from Covid, that carry debt from that closure. And in a country that has the highest tax in Europe.

Even a great business has a limit as to how many times it can get battered before financially or emotionally it becomes unsustainable."

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