Every month, the Irish tax authority publishes data about the various government Covid supports for businesses. The information compiled by the Revenue Commissioners is informative, highlighting the massive government intervention during the pandemic and the scale and depth of the businesses that have availed of the various supports.
But the numbers in relation to the Debt Warehousing Scheme are also troubling. The scheme was one of unheralded triumphs of the pandemic; it was, in effect, a multi-billion euro liquidity package for businesses at a time when they drastically needed a capital buffer.
The total tax debt eligible for the Warehousing Scheme since its introduction is €31 billion, while some 250,000 businesses were eligible to avail of the scheme. Some 91 per cent of the debt has been repaid. At the end of May 2022, some €2.9 billion in tax debt remained warehoused, with 90,000 businesses currently availing of the scheme. This includes 2,897 companies that the Revenue classify as large or medium businesses – it also included a number of high-net-worth individuals.
Worryingly, the level of outstanding debt has remained stubbornly around the €3 billion mark for much of the last six months.
Under the scheme, businesses can temporarily park certain tax debts on an interest-free basis until the end of this year – or until April 30, 2023, for businesses most impacted by the most recent public health restrictions and who are eligible for certain Covid-19 support schemes. After that period, an interest rate of 3 per cent applies.
The trouble is that this money is now falling due at a time when many of the companies that availed of it are struggling due to the energy price escalation.
There are 14,411 wholesale and retail companies currently availing of the scheme. Between them, they owe €652 million, or some 23 per cent of the total debt warehoused.
Some 9,800 companies in the accommodation and food services sector, i.e., the hospitality industry, owe €427 million, while 15,500 construction companies owe €339 million. Between them, these three sectors owe 50 per cent of the €3 billion debt pile that has been parked.
And these are the three sectors most vulnerable at the moment.
Quite bluntly, the companies who still have their debt warehoused are the ones that are most vulnerable in the months ahead.
This was a point that was echoed by two recent reports on insolvency trends in Ireland.
First, accountancy firm Deloitte, which has tracked the level of insolvencies for a number of years, issued a new report stating that the number of corporate insolvencies for the first three quarters of 2022 is 378, a 36 per cent increase on the previous year.
The services sector represented the highest proportion of corporate insolvencies by the end of Q3 2022 with 195 insolvencies, representing 52 per cent of total insolvencies recorded so far this year.
“Rising inflation, higher interest rates and spiralling energy costs are likely to increase pressure on businesses over the coming months. In addition, consumers impacted by inflation and interest rate increases may also reduce their discretionary spending, further exacerbating downward economic pressures,” according to Deloitte partner David Van Dessel, who said that the repayment of warehoused debt “will place further distress on those businesses and may further accelerate the increase in insolvency activity”.
Shortly after the Deloitte data, PwC published a detailed analysis of liquidations in Ireland so far this year.
PwC’s Insolvency Barometer said that the rate of business failures remains at historic and record low levels, but there are signs of an increase in Q3 2022. The business failure rate was 18 per 10,000 companies over the last twelve months to the end of June 2022 – this rate is much lower than the average rate over the past 17 years of 53 per 10,000 businesses, with a peak of 109 per 10,000 in 2012.
However, PwC warned about what was coming down the line. “Inflation and energy costs are immediate issues with interest rates set to become increasingly relevant in 2023 as ECB rates continue to rise. In our view, there will continue to be significant pressure on the profitability and cash flow of many businesses through the winter. The focus should be on performance improvement and cost reduction,” according to PwC partner Ken Tyrell.
The report said that the direct economic damage of business failures in Ireland is expected to be in excess of €2 billion for the year ended 2022. So far this year, businesses have declared insolvency with associated debts outstanding of more than €1.6 billion, but PwC expects this figure to reach well over €2 billion by the end of 2022. “If insolvencies rise to their long-term average norms, PwC estimates that the annual direct economic damage of business failures in Ireland could rise to circa €6 – €7 billion,” according to the accountancy firm.
Given the current economic uncertainty, the Debt Warehousing Scheme will become a big issue. I raised this issue on RTÉ’s new show, Monday Night Live, a few days ago. Responding, the Minister for Higher and Further Education Simon Harris said the government would examine the issue as the initial repayment dates were determined before the true extent of inflation became clear.
Some lobbying groups have called for an amnesty, but this is seen as politically unpalatable. After all, some €1.3 billion of the parked debt is Vat – it has been paid by the consumer and the job of the business is merely to hand it over to the Exchequer. Instead, I expect the government to extend the repayment dates and for Revenue to be flexible about terms of repayment.
It is not appropriate for the debt to be written off – many struggling companies continued to pay their taxes. However, expect leniency about payment terms.
Meanwhile, we had a number of pieces last week about the relationship between multinationals and start-ups in Ireland. First, John Collins outlined why Ireland’s tech multinationals and start-ups need to get closer. After all, in their American home, the big tech firms present here are used to skilled staff working and investing in early-stage companies throughout their career. This hasn’t happened much in Ireland yet, but there are “super early signs” that change may be coming.
Stephen, writing alongside Neave O’Clery, delved further into the theme. Having researched 90 per cent of exporting firms between 2006 and 2019, they found that there were no knowledge spillovers from multinationals to domestic firms.
Ronan argued that the government must do a U-turn on the concrete levy. As he put it: “If the true cost of the levy is something like €4,000 per home, then the breakeven annual income needed to buy a home has been pushed up by €1,000. The government is making a generational crisis even worse.”
Two years after stepping down as CEO of Irish tech unicorn Intercom, Eoghan McCabe has returned to the helm of the business. He talked to Tom about his ambitions for the business, what he has learned over the last two years, and his plan to “make changes and have fun”.
Mark Little and Aine Kerr have struck gold with the sale of their disinformation fighting start-up Kinzen to the Swedish streaming giant Spotify. Speaking to Rosanna, Little explains what the company actually does, and where it is heading.
Sinead wrote about why Kim Kardashian could be a game-changing private equity investor. Sinead argued that Kardashian’s recent SEC fine over an Instagram post shows how acutely the regulator was aware of her ability to move markets in the direction of her choice. “This is why her arrival into the world of private equity is so scary for finance bros all over the world,” according to Sinead.