Last month, I visited an entrepreneur whose food business had just entered the Scarp insolvency rescue process. The first reason he mentioned for the move was pressure to repay warehoused tax debt.

The joint announcements by Minister for Finance Michael McGrath and the Revenue Commissioners last Monday that warehoused tax debt no longer carried interest, and that case-by-case repayment extensions were available beyond the May 1 deadline, will make a significant difference for this business owner and for thousands of others.

It is also a large-scale support scheme for indigenous businesses, in which the largesse of the taxpayer should be acknowledged. 

As Niall Cody, chairman of the office of the Revenue Commissioners, told the Oireachtas Public Accounts Committee on January 25: “The debt warehousing scheme is the cheapest finance available.” At the time, the interest rate on tax liabilities warehoused by businesses was three per cent. It is now zero. An Irish business would find it very hard today to obtain an unsecured loan at less than six or seven per cent.

At three per cent, the State was simply passing on the cost of its own borrowing to the businesses in the warehousing scheme (recent government bond issues have yielded just that). At zero per cent, it is subsidising them. The amount of this subsidy is significant.

No significant interest paid yet

The issue of interest is arising now because businesses availing of the scheme had less than three months left to either pay it, along with the warehoused tax they owe, or negotiate an extended payment plan with Revenue that would have included interest payments. 

Although those who have already paid interest will now get it back, a Revenue spokesperson told me: “The amounts  of interest already paid  which will be refunded are not expected to be significant in the context of the overall scheme.”

Tax debt warehousing began in 2020 as a Covid-19 support measure and the liabilities parked in it were initially interest-free. Businesses began to incur interest between January and May 2023 if they kept debt in the warehouse for longer.

Revenue statistics show that the scheme peaked at €3 billion warehoused by 105,000 businesses in early 2022. One third of the businesses in the scheme then decided to repay their tax debt before they started incurring interest in early 2023. Since then, however, the number of businesses clearing their debt has fallen more slowly (although the amounts in the warehouse continue to decrease in a broadly linear fashion).

According to Revenue, only 2,100 taxpayers had agreed phased payment arrangements for warehoused debt of €158 million at the end of December, an indication of the work remaining to be done.

The number of businesses availing of the scheme is remaining stubbornly above 50,000, or half of peak participation. More worryingly, most of the warehoused debt (€1.5 billion) is concentrated among just 5,347 businesses with liabilities of over €50,000 each. On average, these heavier users of the scheme each owe €280,000.

Faced with what is beginning to shape into a long tail, the Government had to choose between maintaining the hard deadline of May 1, at the risk of causing the insolvency of those who might be able to repay over a longer period; or extending the deadline.

The case-by-case extension on offer is a good middle-ground option that will avoid unnecessary insolvencies. “The aim of this measure is to support viable businesses in reducing their warehoused liabilities in a structured and manageable way, while they continue to trade,” a Revenue spokesperson told me. But it comes at a cost.

When I asked, Revenue and the Department of Finance declined to estimate how long it would take for the remaining warehoused tax to be repaid. The spokesperson said: “It is not possible to forecast the amounts and timing of debt payments, given that payment arrangements are tailored to the circumstances of individual customers in the warehouse. Therefore, it is not possible to provide a reliable estimate of amounts of interest involved” in the foregoing decision.

Looking back over budget papers since 2020, I haven’t been able to find a costing for the scheme. Revenue and the Department also declined to provide me with the amount of interest already incurred and now being waived. When I insisted, the spokesperson said: "Interest on warehoused debt does not crystalise until the debt is paid, and Revenue does not forecast theoretical interest charges in advance of the crystallisation of the associated debt. It is not possible, therefore, to provide a figure for interest incurred on warehoused debt to date and now foregone."

A €4.3m cost to the taxpayer in the past month

We can, however, calculate the parameters of the decision’s cost to the taxpayer. The average amount warehoused has been around €2 billion over the past year, since interest began to apply. The three per cent interest waived is equivalent to a €60 million cost to the taxpayer.

In the past month alone, the Exchequer has foregone  €4.3 million in interest on the €1.72 billion warehoused at the start of the year. 

Since the early 2022 peak, businesses have repaid warehoused debt at a regular pace of just under €600 million per year on average. Should this linear repayment pattern continue, it would take until late 2026 to clear all the debt in the scheme. In this scenario, the State would give up €80 million in interest over its remaining lifetime.

These amount do not cover businesses that go insolvent and fail to repay their debt altogether. As of last July, the Comptroller and Auditor General reported: “Revenue has confirmed that €85 million of debt previously warehoused by 956 businesses has been identified as uncollectable, mainly due to reasons such as liquidation, examinership, bankruptcy and cessation of trading.” 

Cody told the PAC the write-off amount had increased to €87.7 million by the end of last year. Arguably, some of this defaulted tax would not have been collected anyway, so it wouldn’t be fair to count it as a direct cost of the scheme – even though it has probably facilitated larger tax debt to mount before those businesses collapsed. 

Still, the Government’s successive decisions to extend tax debt warehousing past the end of pandemic restrictions, turn it into a medium-term business financing scheme in the face of the inflation shock, and now to do so interest-free can be expected to cost around €140 million.

Those who think it is a good use of public funds will point to the many businesses and jobs saved, and the multiplier effect achieved by the State’s cheap cost of borrowing. Raising the same finance from commercial lenders would have cost the businesses at least twice as much in interest. Before the PAC, Cody actually advised against businesses taking out finance to clear their tax debt warehousing.

But the latest decision to make the scheme a heavily subsidised, zero-interest medium-term lending instrument also raises valid questions. Is it fair to those businesses that squeezed their balance sheet to repay warehoused tax debt one year ago on the understanding that they would otherwise pay interest? Is it skewing competition and rewarding lower performance?

Would a company like Mac Interiors, which collapsed into liquidation after a landmark court case in which Revenue successfully asserted the seniority of warehoused tax debt, have survived under the new terms of the scheme? 

It would probably take a special report by the ESRI or the Comptroller and Auditor General to measure the balance of positive and negative impacts. For those businesses staying afloat past the May deadline thanks to the latest change, however, it is all positive. 

*****

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