the legacy of the pandemic


There were 355 business bankruptcies or liquidations in the Irish economy last year, according to insolvency practitioner PKF. What’s unusual about this figure is that under normal business conditions – without the disruption of Covid – we usually see many more.

The 355 figure was the lowest level of insolvency in 14 years – since the height of the Celtic Tiger – and a fraction of what we saw in the aftermath of the 2008 financial crisis. In 2011 there were more of 1,400.

And yet the economy, at least the consumer-facing one, has been hammered over the past two years, prevented from normal trade by on-off restrictions and squeezed by increased levels of digitalization. So what’s going on?

The government, through financial supports, and tax commissioners, through tax forbearance measures, have effectively shielded many businesses from the full force of the pandemic. These measures have supported many so-called “zombie” companies that would have fallen into the wall with or without Covid.

The big question is what happens next? Weaning the economy off pandemic-era supports, a fiscal imperative for the government, is one of the key challenges. Go too fast and you risk damaging otherwise viable businesses; move too slowly and you only delay the inevitable while racking up more debt for the treasury.

At the end of February, more than 95,000 companies were benefiting from the tax debt warehousing program. Legislative as part of the government’s recovery plan of July 2020, the program has enabled companies to effectively park their tax debts. To date, 3.1 billion euros have been stored, or approximately 30,000 euros per company. A breakdown of debt shows that €1.46 billion relates to VAT, while €1.48 billion relates to PAYE liabilities.

Debt recovery

A spokeswoman for the tax department said the debt recovery approach would be sensitive, flexible and tailored to each business based on its ability to pay.

There would also be no immediate cut in aid, she said, because under the terms of the program participating companies can park debt for another year – until 2023 – before interest does not begin to accrue. And even then, that interest will be at a low rate of just 3%.

Normally the tax office charges interest on unpaid tax debts at 8-10%. “Revenu would like to emphasize that there is no immediate obligation to pay debt currently under the debt warehousing program; it means businesses can focus on rebuilding business levels through 2022 without having to worry about paying debt,” she said.

She also noted that businesses that have been unable to trade in any way during the strictest shutdowns and may have made the difficult choice to temporarily lay off staff will more than likely have incurred little. or no VAT and PAYE responsibilities during the period.

“Businesses experiencing tax difficulties are not new and in many ways are part of natural business cycles. For this reason, Revenue has a strong track record of working with businesses to reach tax payment arrangements that suit both the business and Revenue,” she said.

But will we see an upsurge in insolvencies when this debt is called?

According to restructuring expert Declan de Lacy, partner of PKF, there are three types of companies facing financial difficulties.

The first category was not viable even before the pandemic, but got a reprieve with government support and will fail once conditions normalize, he says. There was a noticeable increase in insolvencies in early 2020 just before the pandemic, most likely related to Brexit, but these businesses were inadvertently saved by the crisis and the deployment of support, de Lacy says.

“[Back then] whoever was under pressure with the IRS, their landlord or their bank… the pressure just evaporated,” he says, noting that the IRS effectively halted all enforcement proceedings, allowing companies to pocket the money and pay other costs.

He estimates that there are around 200 companies that will be liquidated immediately once the supports end.

Cash crisis

The second category includes those facing a cash flow crisis due to tax and rental debt accumulated during the pandemic. If they don’t have a process in place to fund themselves in the future through the Examiner or the Scarp (the Small Business Administrative Rescue Process) or some other method, many of these entities by elsewhere viable could wind up in liquidation, he says.

The third category of affected businesses are facing an altered consumer landscape as a result of Covid, he says. De Lacy gives the example of a city-centre company dependent on frequentation of offices or face-to-face custom, which no longer exists.

“They have overhead based on a level of turnover that may never come back,” he says.

De Lacy thinks we will see a gradual increase in insolvencies rather than a big bang. “Maybe we’ll get to that number of around 1,000 again, but it won’t be in 2022, it might not be in 2023, because people will hang on for as long as they can,” he said.

The smarter companies will now work on solutions while creditors understand where the debts are coming from and “are still potentially compassionate”, he says.

The elephant in the room and Covid’s most lasting scar, however, is unpaid rent. While SMEs in Ireland have far less bank debt today than they did in the aftermath of the financial crisis, De Lacy says many businesses have not paid rent for two years.

It’s potentially a much bigger problem than tax debt, he says.

‘There is a statutory mechanism to pay off debt in storage, but with rent arrears there is no structure they are entitled to unless they enter a scrap scheme or examiner.’

And if business revenue has dropped due to increased digitalization, many will face a difficult adjustment.

De Lacy has spoken to several high-profile retailers who are more than 18 months behind on rent with little or no chance of paying it.

First lock

Kyle Kennedy, managing director of Kylemore Karting in west Dublin, Europe’s largest indoor karting arena, said the business was given mortgage leave during the first lockdown in 2020. However, lenders advised him to do it again – in the second lockdown. in 2021 – would potentially hurt its credit rating, a key factor for the company, which has benefited from capital funding in the past.

Although he didn’t trade, he used cash reserves built up during better times to pay the mortgage during the period, Kennedy says. It was able to retain all of its staff through the government’s Employment Wage Subsidy Scheme (EWSS). As a consumer-focused company, it’s been hit hard during the pandemic, but Kennedy says it’s weathered the storm and is in a good position to pick up where it left off before the pandemic. .

Another business that benefited from a mortgage holiday and the taxman’s debt warehousing scheme was Fishers cafe and department store in Newtownmountkennedy, Co Wicklow.

Owner Rebecca Harrison says the business has been forced to warehousing a significant portion of its 2020 VAT bill, equivalent to around 10% of the business’ annual turnover in normal times, but is confident the shortfall can be filled in six months provided there are no other shocks.

“Having access to this working capital that we didn’t have to pay allowed us not only to survive, but also to invest in the physical premises of the company,” she says, noting that the company added a corporate wellness center, which includes a skin clinic, hairdresser, physiotherapist and audiologist.

“We’ve grown from a department store to a retail and wellness center,” Harrison says.

Elaine McParland, owner of beauty salon UpToMyEyes in Greystones, Co Wicklow, did not take advantage of a mortgage holiday or the Income Debt Warehousing Scheme, using cash reserves to stay afloat during the lockdown. She also had business interruption insurance, which covered three months of loss of turnover, when the insurer finally agreed to compensate her.

McPartland says she has had more problems since the business reopened, with people canceling appointments and staff absent due to Covid. “The last four or five months have probably been trickier,” she says.

Support cost

We know, anecdotally, that some companies continue to store revenue debt until interest begins next year, while others pay it off to remove current liabilities from the balance sheet.

The government has allocated nearly 20 billion euros to various economic support schemes. The EWSS is due to end at the end of April, while the Pandemic Unemployment Payment (PUP) program is due to end at the end of this month. This level of support was never sustainable in the long term.

“We know support cannot go on forever, and the government needs to scale back as soon as possible,” says Neil McDonnell, chief executive of Irish Small and Medium Enterprises (Isme).

“Recognizing that this money is owed to the public purse and must be paid, there are certain sectors where two years of trade to pay off this liability cannot be compensated retrospectively,” he says. “In effect, this means that the tax authorities will make some of these companies insolvent by collecting the money unless repayment is scheduled over a longer period,” he says.

The end of Covid-related restrictions was supposed to trigger a return to normal business conditions, but the number of virus cases is still high and that is frustrating many businesses.

The broader economic outlook is now also clouded by the Ukraine crisis and the ongoing cost-of-living squeeze. It’s hard to say how these forces will affect companies and their attempts to emerge from the past two years.

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