Tax warehouse payments are due on 1 May 2024

The 1 May deadline for repayment to Revenue of tax debt through the warehousing scheme is looming. If your business owes money to Revenue, you don't have an agreement set up, and you aren't yet sure of what to do next, read on. Declan Hanly, Corporate Restructuring Director outlines the options.

Back in 2021, we predicted in our overview of the current and potential insolvency landscape that some businesses with warehoused debts might struggle to meet future tax liabilities, even as the economy rebounded from the pandemic.

As author Declan Hanly argued then, while debt warehousing had been a great assistance to businesses during Covid-19, any tax balance would still have to be settled. Revenue was offering breathing space, not a write-off. With increases in the minimum wage, higher energy costs and various other factors following, that has indeed been the case. There have been some well-documented struggles in some sectors, most notably in hospitality, to meet the urgency and full liability.

An important deadline is approaching

On 1 May 2024, Revenue will start collecting repayments for debts accrued through tax warehousing. Businesses must have an agreement in place before this deadline. With the clock ticking, Declan says, there is no room for complacency or procrastination. This is, however, the moment to pick a plan if warehoused debt is a potential risk to your business health or survival.

Businesses with substantial debt should consider restructuring options, with the two choices being the Small Company Administrative Revenue Process (SCARP) or examinership. Both allow an insolvent business to deal with its creditors and define a path to long-term survival. Each has its own conditions and context, however.

Here's what businesses should know about SCARP and examinership (and how Crowe Ireland can help).

Debt warehousing update: 3% interest no longer applies

The Irish government introduced the Debt Warehousing Scheme in May 2020 as an exceptional measure to help businesses faced with cash-flow and trading difficulties during the Covid-19 pandemic. In simple terms, businesses could choose to defer or "warehouse" their tax liabilities (e.g. VAT and PAYE) until they were in a better financial position.

Period 3 of the scheme kicked off on 1 January 2023. Unlike the first two periods, which charged 0% interest on warehoused debts, Period 3 initially levied 3% interest. However, in February 2024, Minister for Finance Michael McGrath announced that the interest rate on tax debt frozen since the pandemic would remain at 0%.

What hasn't changed is the repayment deadline for agreeing a Phased Payment Arrangement (PPA) with Revenue. On 1 May, time is up.

Even if a lot of businesses have accumulated significant Revenue debt, the long-term goal was always to prevent viable companies from going out of business. What many businesses with warehoused debts do next — in these few remaining months — is what really matters, says Declan, with an important qualifier. If your business isn't up to date with its current taxes, some of your options might already be limited.

Could you agree a Phased Payment Arrangement (PPA)?

The first option for businesses who can't pay all their taxes by the due date might be to negotiate a PPA with Revenue. This allows them to repay tax debts in instalments over a maximum 60-month period (it was 36 months before the pandemic).

The total debt must be €500 or more and businesses must have submitted all tax returns to Revenue and not have a PPA already in place. If payments are missed, the PPA is cancelled.

Because entering into a PPA commits a business to repaying the full amount within a maximum five-year period, it's not always a solution for already-struggling companies. More pertinently, it's not even an option for many companies with recent gaps in their Revenue returns. If that's the case with your business, go straight to our SCARP section.

• Who's it for? If your business owes a relatively small amount and you're committed to survival without restructuring, a PPA may present the best available solution.
• Advantages: No further investment or cost is required. PPA allows you to pay back the debt through regular cash flow.
• Disadvantages: You pay back the full amount over a long period of time.

Understandably, some business owners want a faster resolution to their tax debt issue and want to make a clean break with the pandemic years. More pertinently, however, many businesses will not be in a position to pay their current bills as they fall due and make the necessary repayments to Revenue as part of a PPA. If that describes your current thinking, there's a potential solution that — at least so far — has been remarkably underused by business leaders.

The Small Company Administrative Revenue Process offers a solution

We're referring to SCARP. It gives eligible SMEs the option of restructuring their debt to avoid liquidation. Unlike a PPA, it allows for the writing down of debt, but this is contingent on fresh investment.

Introduced in 2021 to support small and micro companies, SCARP is available only to companies with no more than 50 employees, a turnover not exceeding €12 million and a balance sheet not exceeding €6 million.

For an in-depth view of SCARP, read about the step-by-step process here.

One of the key features of SCARP is that the company must appoint a Process Advisor (PA) who will make the formal request to Revenue to participate in a rescue plan and will submit a report to say whether the company has a reasonable prospect of survival. Note that the company's auditor cannot be the Process Advisor.

The other important feature to be aware of is that SCARP allows an "excludable creditor" (which in most cases would include Revenue) to opt out of or reject the process on a number of grounds:

• Previous failure of the company to comply with tax requirements
• The company being currently subject to a Revenue audit or intervention or party to an appeal

In short, if you are not up to date with your current taxes, the chances of Revenue entering into a SCARP agreement are reduced, no matter how much you owe. Revenue will assess each business on a case-by-case basis, but if you are not up to date with your current taxes, there is no requirement for Revenue to participate in the SCARP. In that scenario, examinership (see below) may be the only option remaining.

As any professional advisor will explain, SCARP also imposes certain other conditions that businesses need to be aware of:

• Revenue debt transferred to SCARP is removed from the debt warehouse (i.e. no longer 0% interest)
• Additional tax liabilities may be due and must be considered in the rescue plan
• The company must file and pay all taxes on time
• Failure to comply with the terms of the SCARP agreement may result in Revenue applying to suspend the process or place the company into liquidation

Surprisingly, the number of Irish companies entering SCARP arrangements has yet to reach triple figures. One reason, according to Declan, is that companies simply don't know about the scheme. One suspects that this will change in the next few months as companies explore their options before the deadline arrives.

• Who's it for? SMEs who owe larger amounts and are insolvent but have a reasonable prospect of trading profitably into the future.
• Advantages: No need to go through the courts and the business can write off a large portion of debt.
• Disadvantages: A downpayment (i.e. fresh investment) is likely required, and if creditors reject the plan, it is likely that a liquidation will follow.

In a business context, SCARP moves fast — just 41 days from the appointment of the Process Advisor to the submission of the rescue plan (and voting). While it's a far more affordable alternative to examinership for SMEs, the pressure on preparation is considerable.

"Most businesses will usually have investment to fund the proposals lined up already," explains Declan, since the 41-day window leaves very little room for finding new revenue sources. Projected cash flow is also an option, but is not as common a source of funding for SCARP proposals. "It's a tough sell for creditors, particularly Revenue," says Declan. "They want to see fresh investment."

Circumstances aside, the advantages of SCARP are compelling for a business under pressure. It can be activated within the narrow timeframe remaining and mitigates the damage done to creditor relationships in the long term.

Unfortunately, the terms and conditions of SCARP take it off the table for larger companies with a higher turnover. For them — and for SMEs with outstanding Revenue debt from previous years — the options are effectively reduced to examinership.

In some cases, examinership might be more appropriate

Unlike SCARP, the examinership route is available to businesses of all sizes (including SMEs), although it tends to be for larger corporations with a more substantial debt. Under the terms of an examinership, the business reaches a court-approved compromise with its creditors, essentially by proposing a better return through restructuring than liquidation would allow.

As with SCARP, fresh investment sets the spirit of the plan. This can be from a third-party investor, existing directors or shareholders, or even via a loan from another business unit within the same group. Whatever the source, the investment must be greater than the sum creditors would have received after liquidation. While not exactly a win-win, examinership is another way to avoid the worst-case scenario.

Key differences between examinership and SCARP

• Examinerships are applied for (and approved) via court, not through a Process Advisor liaising with Revenue and creditors.
• They take longer (up to 100 days) and cost more to execute.
• There is no excludable debt, meaning creditors (and Revenue) cannot opt out. This means that (unlike SCARP) if your tax history shows delinquent payments or anomalies, Revenue debt has to be included.

If a restructuring plan falls apart, an agreement can't be reached, or conditions can't be met from the outset, the most likely outcome is liquidation.

What can a business salvage from liquidation?

The end of a company doesn't have to put an end to business altogether. There's still the possibility of repurchasing IP from the liquidator, rebooting a lease with a landlord and starting again with a new name. That said, liquidation is arguably the toughest option to manage in emotional terms.

Unlike in the US, where Chapter 11 bankruptcy filings carry relatively little stigma (despite surging 68% in the first half of 2023), Irish directors tend to be more reluctant to put a company into liquidation. Perhaps there's a stronger emphasis on maintaining good relationships with creditors.

How Crowe Ireland can help your business with restructuring

If you are alarmed about the impact debt warehouse tax repayments will have on your business, or you are struggling to meet the timeline for repayment, talk to us today to establish where you currently are in the sequence of steps to consider.

What we do

If you're considering a PPA, our tax department is on hand to help draft your business plan to send to Revenue. If restructuring is the chosen route and you are seeking to appoint a Process Advisor, Examiner or Liquidator, our corporate restructuring team can provide expert guidance on sending a thorough, persuasive proposal to Revenue.

The time remaining is short, but the planning must be detailed and exhaustive. Your business will need to have a complete picture of financials, forecasts, tax compliance status, investment options and creditor attitude. In particular, the continued cooperation of creditors is essential to success.

This is one of those moments where an experienced, professional team can make all the difference. Talk to our corporate restructuring team today about your next step.