Where does IT stand in the Age of Distress?

Where does IT stand in the Age of Distress?

Company distress data recently released by Real Business Rescue, business turnaround and restructuring specialists, part of Begbies Traynor Group, ranks industries according to distress levels, including the Telecommunications and IT sector. The financial distress statistics are based on Red Flag Alert and Companies House data for Q1, leading up to the coronavirus outbreak.

Ahead of the Q2 data release, we take a look at the position of the IT industry in the top 20 sectors in distress as of 1st April 2020 and the mitigating factors. The IT sector ranks at a low 19, ahead of the financial services sector at 20. Taking a detailed look at the figures, 11.2% of IT businesses were showing signs of financial distress between January 2020 and March 2020 which reflects 33,618 distressed businesses, out of a total of 298,910 active IT businesses in the UK. We take a look at mitigating factors which may have improved or worsened the standing of the sector during Q1 and beyond.

Pending IR35 Private Sector Reform

The IR35 reform in the private sector was due to come into effect from 6 April 2020; however, this was promptly delayed until 6 April 2021 following the declaration of the coronavirus pandemic. In preparation of the measure which reassigns the responsibility for determining IR35 status from the contractor to the end party when working on a private sector contract for a medium to large organisation, many limited company contractors ceased trading and switched to alternative operating structures. If working as a limited company contractor presented a less lucrative way of operating in a post-IR35 reform era, many took the initiative to switch to more efficient ways of working ahead of April 2020.

Leading up to the original enforcement date of April 2020, key organisations ceased contractor engagements due to the liability associated with determining the tax position of contractors caught by the IR35 private sector reform. This included the likes of household names which were instrumental in employing a host of skilled UK contractors, such as Barclays, Microsoft and Rolls Royce.

As a result, many contractors across the country were phased out from applying for competitive contracts as selected medium to large businesses stopped engaging with limited company contractors in light of the upcoming reform. In addition to cutting off a regular income stream, many contractors were forced to rethink the delivery of their services and switched to alternative and less lucrative ways of operating to score contracts.

Covid-19 Impact on IT industry

Although the first coronavirus cases were confirmed in the UK in the final week of January 2020, many countries were in full flow of complying with social distancing measures and remote working at this stage as a result of Covid-19, creating a worldwide delay in the fulfilment of IT services and the import and export of industrial equipment. This disrupted the supply chain for the IT industry as each country around the world was at a different stage of responding to the coronavirus pandemic.

IT Contractors in demand

As we await the release of Q2 distress data, contract work in the IT sector is experiencing a spike due to the increase in remote working. As a result, businesses are required to significantly strengthen their IT infrastructures and enhance security to allow for home working, creating a demand for IT services. Remote working arrangements as a result of the pandemic may be here to stay for the long term to protect public health until the eradication of coronavirus, which in turn, continues to minimise business overheads, encourages seamless communication and streamlined working. This has created a demand for data security and communication specialists as businesses are looking for ways to bolster data security and create new working environments to allow for collaborative working.

As the IT sector generally ranks stronger in comparison to the hospitality, leisure and food industries, it is in a good position to withstand the unprecedented financial pressures posed by Covid-19. For a refined view of the data, the Age of Distress infographic delves into the level of distress by the age of a limited company and regional and sector-specific data, helping you gauge the financial health of your business.