Should small firms have Covid tax debts written off?

The last few weeks have been busy ones for most businesses in Ireland, particularly those that were worst hit by the Covid-19 restrictions before they were lifted three weeks ago.

All the economic indicators are pointing towards a strong recovery taking place, as consumers once again get out and spend and life returns to normality.

But amid the positivity, challenging times still lie ahead for the more than 20,000 firms still dependent on state supports.

They are being gradually wound down over the coming months, forcing these businesses to once again stand on their own two feet, or face the prospect of restructuring or even closure.

Recent data from PwC suggests 4,500 companies were saved from going bust during the pandemic by the Government’s interventions.

But it also estimates there is a debt overhang of €10 billion at least, meaning many firms will have to restructure in the months ahead if they are to survive.

And while here so far, corporate insolvency rates are down around 30% on pre-pandemic levels, in England and Wales they saw creditors’ voluntary liquidation (the most common type of insolvency) reach the highest level since records began in the final quarter of last year

“While they have not gone bust, many are on life support and will need additional support to repair their balance sheets as the service economy fully reopens,” Ken Tyrrell, Business Recovery Partner at PwC Ireland told Morning Ireland Business last week.

Tax warehousing

But just what that support might be is a thorny question?

Should we be thinking in the realm of some sort of debt forgiveness, particularly when it comes to the tax debt owed to Revenue that has been warehoused for the past two years.

The Restaurants’ Association of Ireland estimates that as much as a quarter of the debt owed to Revenue that is currently warehoused is owed by hospitality businesses

It is an argument that has been proffered by the Restaurants’ Association of Ireland (RAI) whose members are concerned about the current situation.

“It will be exacerbated when the subsidies are waived or reduced to zero and that is scheduled to happen in May,” says Adrian Cummins, RAI chief executive.

“When you get to May you will see the big shake-up in the industry then.”

Mr Cummins estimates that as much as a quarter of the debt owed to Revenue that is currently warehoused is owed by hospitality businesses, and when it starts to fall due, businesses that are becoming viable again may no longer be so.

Latest data from the tax authority shows that at the end of January 105,000 businesses were availing of tax warehousing, having temporarily parked debts totaling €3.2bn.

€1.5bn of that is VAT, a similar amount is employers’ PAYE and PRSI and the remainder is income tax and money owed under the wage supports.

Eligible firms may continue to warehouse liabilities until the end of April, and then keep it parked interest free until 1 May of next year.

At that point the debt may be paid in full without incurring an interest charge or can be paid through a tailored phased payment arrangement at a significantly reduced interest rate of 3% per annum.

For those no longer eligible for supports, tax debts are parked until the end of this year with repayments starting from 1 January of next year.

Some firms though have already started to pay back what they owe.

Debt forgiveness

Fishers Boutique Department Stores in Newtownmountkennedy in Co Wicklow availed of the tax warehousing scheme in 2020, parking some of the VAT it owed in order to free up working capital during the period it was forced to close under the Government restrictions.

It paid its taxes as normal through 2021, and now with the trading environment picking up again, it has decided to start paying a little bit of what it owes to Revenue each month to start clearing its liability.

The prospect of the State, via revenue, forgiving the debts of tens of thousands of businesses is fraught with moral hazard

Managing Director Rebecca Harrison says the retailer is incredibly grateful for the warehousing and the other state supports it has availed of over the past two years, which meant it didn’t need to take out additional debt from banks or other lenders.

“Certainly in terms of support it has been an incredible help to have that cash in our system rather than sitting in theirs over the past two years,” she says.

“It has certainly meant that we’ve been able to hit the ground running.”

However, she also feels there is a place for some debt forgiveness to give some businesses that are viable but vulnerable a chance to emerge from the pandemic.

“I do think they are being very fair about it,” she explains.

“Absolutely we would love some forgiveness, a little bit of a write-off of course.”

“But I understand that they need to do that maybe on a case by case basis, or there has to be some fairness in that too, so there needs to be some limits in place as there was for some of the other grants that you qualify in this scenario and not in that scenario.”

An alternative, she argues, would be to extend the payment period even further, because “time is a great healer.”

But the prospect of the State, via revenue, forgiving the debts of tens of thousands of businesses is fraught with moral hazard.

It may be unfair to write off tax debt when many businesses have managed their tax in trying times

Sources in the hospitality sector suggest that moral dilemma becomes even more complicated when you factor in that some firms opted to use up precious working capital at the start of the pandemic to deliberately pay revenue what they owed it so as not to be in-hock to the taxman.

“Businesses that have warehoused tax debts have already received considerable government supports to help them cope with the pandemic, which in effect is low-cost finance,” says Cróna Clohisey, Tax and Public Policy Lead at Chartered Accountants Ireland.

“It’s not clear if it’s fair to have this tax debt simply written off when so many businesses have managed their tax obligations in trying times.”

Fairness and equality

Revenue’s own mission statement in its governance framework requires it to ensure fairness and equality when dealing with taxpayers.

“In the realm of debt forgiveness, isn’t it quite difficult I would have thought for the Revenue Commissioners to be judge and jury on that decision?” suggests David Van Dessel, partner in Deloitte’s Financial Advisory Restructuring Services division.

But Revenue isn’t the only big class of creditor that is weighing down on small firms right now.

Many landlords also came to an arrangement with tenants during the height of the pandemic, but are looking for payback now.

Suppliers too showed forbearance which is now due to be called in.

“This will become an issue, especially for those businesses in the experience economy or businesses that are further down in the supply chain that didn’t qualify for some of the Covid supports,” says Sven Spollen-Behrens, director of the Small Firms’ Association (SFA).

“The next 12 months are going to be critically important, if not the next 12 weeks.”

The SFA has not yet come to a position on whether debt forgiveness should be part of the solution or not.

‘Examinership light’

For now, Mr Spollen-Behrens points to the relatively new SCARP process – or “examinership lite” as it has been dubbed – as a way of dealing with debt issues as they arise for businesses.

And David Van Dessel agrees.

“Yes, that’s a good option,” he says.

“To restructure historic liabilities, achieve debt write-off by agreement with a company’s creditors, and then continue to trade.

“And that would include the Revenue Commissioners.”

He said SCARP covers a lot of companies, including those with a turnover of up to €12m and 50 employees.

“That is a lot of companies,” he claims.

And for those that don’t fit because they are too large, there is also the option of examinership.

“I think it would be very difficult for the Revenue Commissioners to be handed the responsibility to be the only creditor that has to sort out the arrears.”

The Department of Finance says Budget 2022 projections did incorporate the assumption that 25% of the warehoused tax liabilities will not be repaid, because the businesses that have availed of the scheme will never be in a position to repay.

“This is a conservative technical assumption but it is considered better to err on the side of caution in this matter,” the Department said in a statement.

“It remains the position that Revenue has not estimated the potential amount of warehoused debt that will not be paid as the expectation is that flexible payment arrangements will assist businesses in meeting their obligations over time.”

And so it is perhaps little surprise then that the official Government position on the issue is that there are no plans to introduce an amnesty for any tax liabilities.

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