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Should I consider Mothballing my business?

Coronavirus - Should I Consider Mothballing my Business, cocooning, mothballing, mothballing my business


Updated 16th April 2020 – 10:30

If there is a temporary change in business environment such as we are seeing from Covid-19 then business owners have the following decision:

  • Continue trading (and possibly benefitting) (e.g. delivery companies)
  • Move trading online
  • Pivot the business (e.g. restaurants doing take away)
  • Repurpose to produce in-demand goods (e.g. BrewDog – hand sanitiser)
  • Mothball the business temporarily
  • Solvent/Insolvent liquidation

What is Mothballing?

  • Cocooning, or mothballing, is a temporary suspension of a business.
  • All cash outflows where possible are stopped or reduced and the business is left in a state from which it can emerge once the prevailing business conditions improve

What should you consider?

The decision to mothball is likely to be difficult. The following are some matters that should be considered prior to making any decision:

  • Customers and suppliers – if the business is a vital link in a supply chain then there may be an opportunity to agree ‘relaxed terms’ with customers / suppliers to help continue trading and these should be explored.
  • Expected revenues – If some income is still being generated it may be useful to prepare some forecasts first.
  • Short Term Financial forecasts – Two cashflow forecasts should be prepared. The first forecast should assume the business will stay open, revenue is lower than normal, and some costs are reduced whilst trade continues. The second forecast should show the cash impact of mothballing the business with no revenue income and as many costs as possible reduced. Comparing these two forecasts will show the difference in cash terms of whether to keep the business open on lower revenues or to mothball the business.
  • Longer Term Financial Forecasts – Despite the uncertainty it is helpful to have a business plan which shows how the business is expected to recover. For example, estimating how long it will take to generate cash again will help with discussions when speaking with creditors, lenders and HMRC.
  • Other considerations that should also be taken into account include the impact on your customers & suppliers in the long term, how quickly the business can return to operation after mothballing and how long this interruption is likely to go on for.

Matters to consider when Mothballing

Prioritise – Focus attention on the biggest cost items and those critical to the future of the business. These are the ones that will have the biggest impact (e.g. payroll, rent). Once these are managed attention can be turned to the smaller / less critical costs.

Communicate – Ensure that relevant stakeholders are informed. Remember to be honest and upfront (even if delivering bad news) as this will help maintain relations with your stakeholders.

Negotiate – These are unprecedented times and every business and person will probably have been impacted by Covid-19 in some way. This means there is a higher likelihood of being able to negotiate and find novel ways of dealing with any issues.

Think long term – Just as important as how you mothball the business in the first place is how you unwind what you do in the future. Simply stopping paying creditors is likely to mean there will be substantial numbers of demands when the business starts to operation in the future. It is important to communicate, trying to find solutions that work for both parties such as incentives, payment in kind etc.

Customer contracts – It may be that the business has material customer contracts which may not be fulfilled as a result of Covid-19. In this instance, the customers should be contacted to explain the situation. Some contracts may have a Force Majeure clause which gives relief from fulfilling contractual obligations.

Maximizing cash inflows

  • When mothballing a business, all potential sources of cash should be reviewed. These include:
  • Collecting any outstanding trade debtors.
  • Considering whether liquidating stock is appropriate. Having the cash now may be a benefit but could impact on the speed and cost of re-starting the business in the future.
  • Apply for a refund of any Statutory Sick Pay which may be due as a result of the government changing the criteria. Not available yet but more details can be found here
  • Applying for available grants:
    • Small business grant funding of £10k for all business in receipt of small business rate relief or rural rate relief link here
    • Grant funding of £25,000 for retail, hospitality and leisure businesses with property with a rateable value between £15,000 and £51,000 link here
  • Review insurance policies to ascertain if there is a potential claim that can be made for pandemics, government ordered closures. What is covered in policies differ significantly between insurers so it is recommended to check

Minimising cash outflows

Prepare a breakdown of all of the costs of the business so all expense lines can be reviewed. Bank statements are a good place to start. Some costs are likely to be variable and these may have already ceased, whereas some are fixed (e.g. rent). All of these costs need to be considered when mothballing as the target is to minimise or stop all costs.

The process should start with the largest and most business-critical expenses such as payroll and rent and then work down to the less essential and smaller items.

If expenses are non-essential and the supplier is unlikely to take enforcement action, then the simplest approach would be to stop making payments and explain your position to them.

It should be remembered that Directors have duties, and if the business is already experiencing financial difficulty then Director’s duties towards the creditors take priority. See below


  • When mothballing the business, it is likely that all staff will be furloughed through the Coronavirus Job Retention Scheme (CJRS). The conditions of the CJRS means the employees cannot do any work for the business.
  • The key facts of the CJRS are:
    • Minimum period of 3 weeks
    • Covers 80% of salary (plus employers NI + minimum pension)
    • 3 months from 1 March 2020 (currently)
    • First payment in April so potential cash requirement of business to cover salaries until refund received
    • Cash squeeze may be covered through commercial banks offering overdrafts and agreement to defer salaries with staff
  • The directors of a mothballed business can also be furloughed. The Government have said that directors may fulfil statutory obligations but that they should not generate commercial revenue or provide services. More detail can be found here: https://www.gov.uk/guidance/check-if-you-could-be-covered-by-the-coronavirus-job-retention-scheme
  • Whilst using the CJRS may seem the most appropriate thing for a business considering mothballing to do, they should also consider:
    • Discussing with staff a reduced or deferral in salary in return for more holidays, a bonus once operating starts again etc.
    • Redundancy – however this is likely to be expensive when staff can be put on CJRS. Also need to consider recruitment (time and costs) when business starts running again.


  • Key steps
    • Stop rent payments being made
    • Communicate with your landlord
    • Take advantage of the Government creditor moratorium (see below)
  • Take advantage of the Government scheme
    • The Government introduced a creditor moratorium in relation to commercial tenants on 23rd March 2020 which currently expires on 30 June 2020.
    • This means that a business is protected from action brought by its landlord including eviction if it fails to make payments as a result of Covid-19. More details are here: https://www.gov.uk/government/news/extra-protection-for-businesses-with-ban-on-evictions-for-commercial-tenants-who-miss-rent-payments
  • The advice is to speak to your landlord early and explain the situation. If the business was a good tenant before the crisis then the landlord should be willing to reach a solution which works for both parties.
  • The business doesn’t want to come back to rent demands once it restarts trading so agreeing a payment reduction once trading restarts would probably be sensible.
  • There have been a number of examples where landlords have agreed rent holidays or deferrals. There are many other options including rent reductions, changing in terms, part occupancy and turnover based rents.
  • The Government imposed moratorium covers rent payments but not service charge or other agreed leasehold costs which remain payable. Again, speak to the relevant parties to come to an agreement.


  • Key Steps
    • Stop payments being made
    • Take advantage of the Government scheme if possible
    • Speak to council to inform them of your situation and agree a payment deferral
  • Take advantage of the Government scheme
    • 12 month business rates holiday for all retail, hospitality, leisure and nursery businesses (in England)
  • Some local councils are bringing in Covid-19 support measures to delay or change the payment terms.
  • Like Time to Pay with HMRC, Councils have in the past agreed to the rates bills being paid in installments to spread the costs.
  • The advice is to speak to the council early, inform them of your intention and come to an agreement which works for both parties.

Tax / HMRC

  •  VAT
    • Key Points
      • Cancel direct debit and don’t pay VAT for this quarter
    •  Take advantage of the VAT payment deferral for the next quarter
    • The government has allowed businesses to defer VAT payments between 20 March and 30 June 2020 meaning any quarterly VAT payments which are due to be made in that period (or all of the monthly VAT payments if the business pays on monthly) can be deferred
    • To be eligible a business needs to:
      • Submit the VAT return on time
      • Cancel the direct debit to HMRC
      • But – the business does not need to inform HMRC that they are deferring payment
    •  However, if the business receives a VAT refund these are still being paid so VAT returns should be submitted as soon as possible.
  • Time To Pay (for all tax due)
    • Key Points
      • Speak to HMRC on 0800 024 1222 to agree a deferral of any tax due
    •  HMRC can use their discretion to allow you to pay any existing tax bill over a period (Corporation Tax, VAT and PAYE/NI).
    • It is suggested that you speak with HMRC shortly (one or two weeks) before the relevant tax is due to agree a Time To Pay (TPP) arrangement. HMRC have set up a dedicated helpline to call (0800 024 1222).
    • HMRC will want to learn more about the situation, understand the reasoning for using TTP and how you will repay the tax in the future
    • Arrangements to date have included installment payments, suspending debt collection or stopping penalties and interest where there was a difficulty to pay
    • TTP only covers a specific tax liability. HMRC will expect all future tax liabilities to be paid as they fall due – so if another tax liability approaches you will need to engage HMRC again.

Existing Loans

  • Key Points
    • Speak to lender and agree new terms
  • Speak to the lender and negotiate an agreement. Options could include:
    • Capital repayment holidays
    • Covenant waivers
    • Accrued interest
    • Extending the term

Hire / Leasing

  • Key Points
    • Stop payment
    • Communicate with lessor
  • Apply for a postponement of payments for any hire purchase or leases.
  • For company cars, the benefit in kind charge (for employee and employer) can be reduced during lockdown by making the car ‘unavailable’ (e.g. by handing the keys back to the employer).

Other creditors

  • Key Points
    • Stop payments
    • Communicate with creditors
  • Need to be reviewed on a case by case basis.
  • Retainers / recruitment / advertising / marketing / subscriptions / security / facilities management / maintenance / capex can all be stopped.

Other thoughts

Financing options

There are a number of potential financing options available to a business which can be considered. However, if a business is mothballed then the business owner / director should take advice before proceeding, especially if they are concerned that they will not be able to repay:

Other thoughts / considerations which may be relevant

  • Self-employment Income Support Scheme
  • Self-assessment payment deferrals
    • Payment due on 31 July 2020 now deferred until 31 Jan 2021.
  • Universal Credit
    • If staff are receiving Universal Credit and their income changes as a result of being furloughed, then UC payments may change
  • Tax refund
    • Change of accounting period to accelerate trading losses (assuming the business made a loss in the most recent period) so a corporation tax refund claim can be made.
  • Working from home allowance
    • People who have to work from home may be able to claim back additional household costs such as utilities from the government Home working costs which can be claimed back.

Do you need to declare your company (ltd) dormant?

No. Companies are only declared dormant if they don’t have any material transactions during the entire financial year.

Should I be worried about wrongful trading?

Wrongful trading is where the directors of a company continue to trade where there is no reasonable prospect of being able to pay the creditors which are being incurred.

In this instance the directors can become personally liable for creditors if they are found to be wrongfully trading. This is something which directors should consider given the changing trading environment.

However, on 28th March there was a relaxation in the wrongful trading regime meaning that from 1st March 2020 for 3 months the wrongful trading provisions are suspended meaning that where a business is nearing insolvency, directors can continue to trade and incur liabilities with no threat of personal liabilities.

However there are still a number of regulations which directors need to be aware of, not least in the Companies Act 2006 where the directors should act in the interest of the creditors where there is a heightened risk of insolvency.

To protect the directors they should prepare business plans and forecasts, document decisions made at board meetings and document that the decision to continue trading was reviewed regularly.

Contact us if you would like to discuss how your business survives the Pandemic and what actions you need to take. We are here to support you.

Read more about Coronavirus Financial support:


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