Ken Pattullo

However, it is feared that the scale of business distress is largely being hidden by a raft of government support measures together with the pragmatic approach of lenders and HMRC.

The quarterly Red Flag Alert research, which monitors the UK’s financial health, reveals that in the second quarter of 2021, levels of ‘significant’ or early signs of distress in Scotland rose by 24% compared with the same period the previous year, in line with the rest of the UK which also saw a 24% rise. In Q2, over 33,500 Scottish businesses and 650,000 businesses across the UK, felt the impact of this type of distress.

However, the figures also showed some levelling off of financial problems with instances of ‘significant’ distress in Scotland falling by 12% since Q1 2021, and again this was reflected by the UK-wide picture with a decrease of 10% quarter on quarter.

Ken Pattullo, managing partner for Begbies Traynor in Scotland, commented: “While rising levels of early signs of distress compared with last year are concerning, we fear that the real picture is even starker having been artificially suppressed by government schemes. Despite predictions of a tsunami of insolvencies, we have seen relatively low numbers of businesses failing in the first six months of 2021 as the Government has extended its Covid support measures and a supportive lending community has also helped firms to trade through the pandemic.

“However, in the coming months as the Job Retention Scheme among others starts to be wound down, the true scale of distress after 18 months of lockdowns and disruption will become apparent. In such a difficult trading environment as businesses struggle to cope with the impact of the pandemic along with Brexit, it is vital that directors proceed with caution and enlist professional advice to decide the best way forward.”

The data also shows that in Scotland every one of the 22 sectors surveyed once again saw ‘significant’ distress increase year on year. The financial services sector was among the worst affected with a 40% hike in early distress among Scottish firms; real estate saw a 30% increase; and travel and tourism and automotive were up by 28%. Health and education and utilities fared better with rises of 16% and 15% respectively.

In contrast, both Scotland and the UK as a whole saw a decrease in the number of instances of the more advanced ‘critical’ distress (which refers to businesses that have had winding up petitions or decrees totalling more than £5,000 against them).

In Scotland, this type of distress fell by 7% compared with the same quarter of 2020, and by 11% across the UK. The impact of the Government’s insolvency prevention measures were also evident in a 53% fall in ‘critical’ distress in Scotland since the first quarter of 2021, and a 10% fall quarter on quarter across the UK.

Mr Pattullo continued: “Despite hoping that the worst is behind us in terms of Covid business disruption, the ongoing economic uncertainty amid the risk of further waves of infection both here and around the world, makes the future far from secure.

“Many business-critical issues from shortage of staff to problems with transportation of goods and scarcity of products and materials, are adding to the stresses as firms face the cost of staff coming off furlough and the prospect of repaying CBILS.”