Why cash-strapped local authorities are bad news for small businesses
September 13th, 2018
Knees are knocking together in Northamptonshire and heads are being scratched in Somerset. The two county councils are in dire financial straits with one of them teetering on the edge of insolvency. “Why should this worry small business clients?”, I hear my accountancy friends ask: “None of my clients are based in these areas nor do they have contracts with these local authorities”.
The worry, gentle reader, is that the spectre of poor local authority finances is almost certainly heading your way any day soon. And the potential problem for your clients can be summed up in one word – bailiffs (although I recognise they sometimes have an unpleasant job to do).
Let me explain: The financial health of local authorities across England is in decline according to new findings from the National Audit Office (NAO). The report, Financial Sustainability of Local Authorities, says that local authorities are struggling to juggle higher demands and cost pressures against significant central government funding cuts of nearly 50% since 2010-11.
Many local authorities are overspending on services and drawing down their financial reserves (often built up over decades). If local authorities keep using their reserves at current rates, one in ten could have exhausted them within three years.
Northamptonshire County Council has imposed strict spending controls. It needs to save £64 million otherwise it will be at risk of spending more than the resources it has available in 2017-18 – and that, of course, would be illegal.
Meanwhile, Somerset County Council has sought to reassure councillors and residents that it is getting a grip on its finances after auditors warned of “pervasive” overspending. The audit, which was published on July 18, warned that the council’s financial health had “deteriorated” over the last 12 months, and that it was in serious danger of “running out of money in the next two to three years.”
Apart from stopping the money going out, local authorities all over the country are also looking at ways of bringing more money in – and much of that is coming from increased business rates.
More than 81,000 business premises were visited by bailiffs last year over unpaid business rates, according to a report by the real estate advisor Altus Group (other real estate advisors are available). Its investigation, carried out via a Freedom of Information request, received details from all councils in England on how many business premises had been referred to bailiffs – now known as Enforcement Officers – between 1 April 2017 and 3 March 2018.
Out of 353 councils in England, 264 provided details, covering 83% of all commercial properties. The data showed that, on average, bailiffs were sent to 222 business owners every day in the first year since business rates revaluation. In total, 67,705 instructions were made to bailiffs.
Altus Group say that changes to small business rate relief had seen more owners struggle to pay bills than the previous year.
Businesses in England could face a rates hike of £759m next year, because the inflation measure that is used to calculate business rates is set to change. Over the last 10 years, business owners have seen rates increase by a third, or £6.04bn. Business rates income is expected to reach £24.8bn in England this year.
Business rates form part of that assessment because bailiffs can carry away the very items that enable a business to trade – stock, computers, machinery, cars/vans…. In short, bailiffs (by doing their job) can be company killers.
At ipd, we are often asked to assess the viability of businesses and part of that process involves a 360º assessment on the threats to a company’s cashflow – what we call our Financial and Options Review – and what potential problems could be caused by becoming insolvent.