The warehousing scheme brought in during the pandemic allowed Irish businesses to defer substantial tax debts between May 2020 and December 2021. Most companies have managed to return to normal trading at this point, and may have already paid back, or be paying back, this debt. Others have put it on the long finger, meaning some business owners may be thinking about what will happen once repayments kick in, and what kind of effect this will have on the business.
I’ve heard that certain Irish companies are getting ready to fold at the end of this year/beginning of 2024, rather than spend the following four years or so repaying their warehoused taxes. The idea of walking away and starting fresh will be tempting to some. But it won’t be quite so simple. I teased out the implications of such a decision with tax expert Michael Ryan, of Gara Ryan.
What is the Debt Warehousing Scheme (DWS)?
Firstly, let’s recap what the Debt Warehousing Scheme is. Warehousing was brought in during Covid-19 (on 2nd May 2020) as a means of relieving financial pressure on businesses feeling the effects of lockdown. This meant businesses could defer payment of eligible taxes coming due during the period up to 31st December 2021 without incurring any interest or fees.
Initially, companies were required to set up a Phased Payment Arrangement (PPA) with Revenue for any warehoused debt by 31st December 2022. The energy crisis meant that this deadline has been pushed back to 1st May 2024, although as of 1st January this year (2023), interest of 3% is applied to any warehoused debt.
Taxes included in the warehousing scheme are (with certain conditions and qualifiers):
- Value Added Tax (VAT)
- Employer PAYE taxes (Income Tax, Pay Related Social Insurance (PRSI), Universal Social Charge (USC), and Local Property Tax (LPT))
- Income Tax (where income was significantly affected)
- Temporary Wage Subsidy Scheme (TWSS) overpayments
- Employment Wage Subsidy Scheme (EWSS) overpayments
Overall, DWS is a very generous scheme that allowed businesses to navigate huge changes in turnover without a complex application process or onerous paperwork. The interest rate of 3% is very low (remember the late payment interest rate currently stands at 10.5% per annum) and there are no additional fees associated with the debt, unlike a bank loan or other form of financing.
Winding up may not be the best solution
As I said, a few company directors may be looking at their amount of tax debt and – remembering that a PPA will have to be in place within a little over a year – thinking that it might be easier to throw in the towel and have this debt written off. It’s a tempting idea. You may believe as well that there is no personal liability in this scenario because you run a limited company. But the reality is more nuanced than that, and there are quite a few factors to consider. In addition, winding down a business is a lengthy process and could take months or years to complete.
Central Bank economists have warned Revenue against forgiving the tax liabilities of distressed businesses that parked debts in the warehouse scheme. But even without such warnings, Revenue is no pushover and won’t sit idly by as you wrap up your business in a way that suits you. They can intervene in any wind-down/restructuring process (liquidation, examinership, etc.).
The Department of Finance generally maintains a high degree of vigilance when it comes to ‘moral hazard’, working from the principle that if there are no consequences for bad corporate behaviour, there are no incentives for companies to change their conduct. For obvious reasons, the government cannot preside over a situation where some businesses knuckle down and repay everything they owe, while others make no effort at all.
You have more liability than you may believe
Section 997 of the Irish Taxes Consolidation Act 1997 states that a director or employee of a company who holds a material interest (i.e., more than 15% of the share capital of the company) cannot claim credit for taxes deducted if they have been warehoused and not paid to Revenue by the company. This means that a director or employee could therefore be personally liable for the PAYE deducted from their salary but not remitted to Revenue because it was warehoused.
This section of tax legislation is particularly pertinent where a company is wound up or placed into liquidation. Although the limited liability status of the company protects a director against the debts of the company, this piece of legislation transcends the limited liability protection and can result in a personal tax liability for directors, or employees with a material interest, of the company. In addition to possible financial liability, you could find yourself restricted from future enterprises.
What happens if the business isn’t viable?
A company director has a duty to act in the interests of the company, its shareholders, and its employees. However, when a company is in distress, directors have a duty to put the creditors’ interests first. At this point, they must decide if it is better to continue trading or wind the business up. Most importantly, they need to be able to justify the decision.
Let’s say your level of debt warehousing is such that your business is no longer viable. The board of directors must convene a meeting of shareholders to pass a resolution providing that the company cannot continue its business and must be wound up. The next thing you will do is convene a creditors meeting, which a representative of the Collector General will attend. There will be a vote as to whether or not the company is put into liquidation and a liquidator appointed. Revenue stands above all other types of creditor when it comes to insolvency, meaning it will have a huge influence on the choice of liquidator appointed (this is the creditors’ choice, unlike in a members’ voluntary winding up where the directors can appoint the liquidator).
From the moment the liquidator is appointed, you will have no more say in the running of the business. All your powers are ceased. The liquidator will take a hard look at the company’s financial history and investigate why the company became insolvent. If the liquidator establishes that the business was in a stronger financial position, say, 18 months ago, this gives rise to the accusation that the directors have traded recklessness by staying in business and continuing to draw a salary.
Section 610 of the Companies Act 2014 states:
“An officer of a company shall be deemed to have been knowingly a party to the carrying on of any business of the company in a reckless manner if […] the person was a party to the contracting of a debt by the company and did not honestly believe on reasonable grounds that the company would be able to pay the debt when it fell due for payment as well as all its other debts.”
Directors of a company can be examined by the High Court to see if restriction or other action against them are warranted, even where a company is not in liquidation. So, if a liquidator does uncover evidence that you did not fulfil your duties towards the company, this could lead to you becoming restricted or disqualified – meaning you won’t be able to go off and form, promote, or manage a new company for several years.
Remember that possible restrictions aside, it’s not a given that you’ll be allowed to keep your trading name, website URL, etc., or benefit in other ways from folding the business (for example, by taking the company’s intellectual property with you). This will depend on the value of such assets and how the liquidator decides to realise that value.
Alternatives to a creditors’ liquidation
As you can see, liquidating a company isn’t a decision to take lightly and there could be all kinds of knock-on effect from such a choice. It may be the only option if the business has become unviable, but if you believe there is still a good business in there, what are your options? Typically, you would look at a company restructuring, which involves reorganisation your finances and/or business in order to continue trading and avoid insolvency.
Examinership
Examinership is a procedure that protects a viable company from its creditors for a specific period of time, giving it the space to put a rescue plan in place and position itself to keep trading. You apply to the Circuit Court or High Court, and an examiner is appointed to arrange a Scheme of Arrangement so that you can bring in fresh investment and arrange creditor write-downs. You will only be granted an examinership if you can demonstrate both the ability to keep trading (wish a positive cash flow) during the protection period AND a reasonable prospect of survival longer term.
Small Companies Administrative Rescue Process (SCARP)
The Small Companies Administrative Rescue Process (SCARP) helps to restructure small and micro companies through new investment and cross-class cram down of debts. The process is administered outside the court system – as long as there are no creditor objections – meaning it is more cost-effective than an examinership.
However, Revenue can decide to opt out of the SCARP process in its capacity as an excludable creditor. If your warehoused debt is substantial, this could torpedo a rescue plan under SCARP. Revenue will need to provide a reason if it exercises its right to opt out – eBrief 170/2022: Procedures for Small Companies Administrative Rescue Process sets out Revenue’s considerations when deciding whether to opt in, so you can review their process and judge whether this is likely.
Schemes of Arrangement
Chapter 1 Part 9 of the Companies Act 2014 allows for a company to enter into a scheme of arrangement with its creditors (members or creditors or any class of them). This is a statutory procedure that allows you to negotiate a restructuring of obligations and liabilities so that you can pay back all or part of the company’s debts over an agreed period of time.
Informal restructuring arrangements
You could also consider negotiating a private restructuring arrangement with some, or all, of the company’s creditors. These flexible and informal restructurings are not a matter of public record.
What to do if you have substantial warehoused debt
If you are concerned about your level of warehoused debt and feel that the repayments may prove to be too onerous on the business, here are your next steps.
First, get advice from experts about the best way forward. Seek financial advice from your accountant and prioritise your company’s financial health. Don’t avoid getting support because of the cost; the long-term benefit of having a solid plan will easily outweigh consultancy fees! You may decide that liquidation is the only route, but hopefully there will be a path back to solvency.
Get a tight grip of things like spending and credit control. Talk to creditors and debtors so that you can anticipate potential issues (for them and for you) and formulate a plan to overcome them. Make sure you are tapping into every scheme, fund, and aid available to get you through this difficult period – this includes knocking on doors such as Enterprise Ireland and the LEOs.
Finally, make sure to document all of these proactive steps so that if the worst happens, and you do have to hand the business over to the liquidator, you are able to demonstrate that you have acted in good faith and endeavoured to fulfil your fiduciary and statutory duties to the business and its creditors.
Whatever you do, don’t bury your head in the sand. Help is out there and will be forthcoming if you are transparent with people and have a real desire to get through the rough patch.
