Debt warehousing update and SCARP as restructuring option

As a consequence of the Covid-19 pandemic, the Irish economy has been impacted by unprecedented disruption and many businesses have seen significant changes to their trading models, operational structures, and their liquidity position. One would have anticipated an immediate economic fallout for businesses most directly affected. This has not been the case and indeed some businesses accumulated cash during this period. While insolvency numbers have been somewhat muted since the pandemic it is likely that many businesses will now be facing into financial difficulty as their reserves are eroded.

As Government business supports have come to an end, companies are on their own in their post-COVID recovery. Hopes of a rapid recovery to historical norms have long faded.

Support programmes consisted of Government-backed loans, as well as payments to cover a significant portion of the payroll costs for affected businesses. These programmes have been expensive but by and large, have been considered to be successful. The Revenue Commissioners weighed in with the Debt Warehousing Scheme. Some 105,000 businesses availed of the scheme, resulting in €3 billion of Revenue liabilities being deferred.

Having survived through the pandemic, few predicted the challenges businesses around the globe would have to face into; namely, labour shortages, local and global supply chain disruptions.

The Geopolitical situation in Ukraine has added greater economic uncertainty, giving rise to inflation levels not seen since the 1980’s, soaring energy costs and rising interest rates.

The full impact of inflation induced cost increases and increasing interest rates has not yet been felt by businesses. Profitability will be strained, particularly for those businesses operating in lower margin competitive sectors where there will be limited scope to absorb additional costs or pass them on to customers.

Against a backdrop of reduced profitability, companies will need to plan for the repayment of their warehoused Revenue liabilities, while also discharging current tax obligations as they fall due. The Revenue have facilitated business with this Debt Warehousing Scheme at a favourable rate of 3%, compared with market interest rates for working capital facilities. With increased costs hitting businesses and the requirement to repay Covid accrued Revenue liabilities, working capital management will be critically important for businesses in the coming period.

For challenged businesses, constructive early engagement with stakeholders, including Banks, the Revenue Commissioners and key trade creditors is essential. Appropriate professional advice should be taken.

Debt Warehousing:

Most businesses will be coming to the end of the period of warehoused debt at zero interest rate on 31 December 2022.  Arrangements will need to be put in place to begin repaying this debt at the favourable rate of 3% per annum (the normal interest rate is 8% to 10% depending on the tax involved). 

To recap the warehouse term is made up of three distinct periods.

Period 1: This is the period during which tax returns entered the warehouse and for most businesses it ended on 31 December 2021.  The period began when the business first experienced cashflow trading difficulties due to COVID-19. This was:

  • 1 January 2020 for Value-Added Tax (VAT)
  • 1 February 2020 for Employers' Income Tax (IT)

Period 2: This is a one-year period which runs from 1 January 2022 to 31 December 2022. No interest is applied to the warehoused debt during Period 2.

Period 3:  Phase of indefinite duration commencing 1 January 2023 (1 May 2023 where eligible for the warehouse extension*). 3% interest applied to warehoused debt from start of Period 3 to date the debt is discharged. Customers were originally obliged to contact Revenue with their repayment plan for warehoused debt before 31 December 2022 (or 30 April 2023 in the case of the extended cohort). Revenue announced in October 2022 that this date has been moved to 30 April 2024. By this date the taxpayer must agree a Phased Payment Arrangement with Revenue for the warehoused debt. Interest will be applied from the start of Period 3 until the final payment date at a rate of 3%.

*For some businesses, the Debt Warehousing Scheme for period 1 was extended to 30 April 2022.  This applied to certain businesses who were already eligible for warehousing, and who continued to receive Employment Wage Subsidy Scheme (EWSS) and Covid Restrictions Support Scheme (CRSS) up to 30 April 2022 and for certain other Government Covid-19 support schemes also.

Phased Payment Arrangement:

In relation to the Phased Payment Arrangement (PPA) which must be agreed in due course, Revenue encourage taxpayers seeking PPAs to engage with the process as early as possible through the online system. Revenue anticipates that many businesses may need to avail of non-standard terms to agree a sustainable PPA over a reasonable period, while also allowing the business to maintain payment of their current taxes.

The flexibilities already built into the PPA online system during the pandemic will assist and support business. This includes extended payment breaks of up to 12 months, payment deferrals of up to six times and a reduced down payment. A 40% down payment is typically sought where the taxpayer requires tax clearance. However, depending on the specifics of the case, it may be possible to agree a smaller down payment if tax clearance is critical to the operation of the business.

Early engagement with Revenue is also critical if a business agrees a PPA but experiences short-term difficulties in meeting the agreed payments while maintaining current taxes, for example, due to energy costs or seasonal factors. Depending on the circumstances of the case, it may be possible to agree a short payment break or payment deferral until payments can recommence.

Current taxes must be maintained up to date during the phased payment period, and so careful management of cashflow will be required by businesses during this period.

Small Company Administrative Rescue Procedure (SCARP)

Not every business will be able to overcome this further wave of financial challenge which will manifest itself in severe cashflow pressures. It is likely that creditor forbearance that was forthcoming during the height of the pandemic will no longer be available. If current Revenue liabilities are not met, or a suitable payment plan cannot be agreed, all bets are off with the Revenue with regard to the favourable terms of the Debt Warehousing Scheme.

A formal restructure may be required to address the liabilities accrued during this challenging period.

The Companies (Rescue Process for Small and Micro Companies) Bill 2021 was signed into law in December 2021. This Bill amends the Companies Act 2014 and provides for the Small Company Administrative Rescue Process (“SCARP”). SCARP is intended provide a more accessible and cost-effective alternative to examinership for Small and Micro Enterprise’s (SME).

SCARP is available to SMEs that satisfy two or more of the following three criteria:

  • Turnover less than €12million
  • Balance sheet less than €6million
  • Less than 50 employees

A fundamental aspect of SCARP is that it must be demonstrated that the business is viable after the process. This is an out of court process (unless challenged) that can be concluded within 70 days. The Process Advisor (an experienced insolvency professional), will oversee the process, devising a Rescue Plan that is presented to creditors for their approval before being implemented. The Rescue Plan can be passed by a majority in value and number of creditors.

SCARP is seen a cost-effective restructuring process that can be concluded in a shorter timeframe than examinership.

Against a backdrop of a challenging and uncertain economic climate, businesses must closely monitor their financial position and be prepared to act quickly. Those Directors who take advice early, engage with key creditors, such as the Revenue, have an opportunity to mitigate their business risk. The bigger danger comes from doing nothing at all.

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Paddy O' Connell
Consulting Partner
Suzanne O'Neill
Tax Partner

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