It’s no surprise that businesses are still having a difficult time in the post-pandemic economy.
ot only are companies having to deal with an energy shock and supply shortages, but Covid support subsidies papered over a lot of non-Covid cracks in the last two years.
Now that those schemes have been withdrawn, firms are likely to be encountering payment demands on trade credit, rental arrears, and both current and deferred tax liabilities.
Unfortunately, according to a new analysis by the Central Bank, none of the options for dealing with companies in the most distress are particularly attractive.
The tax liabilities look especially thorny at the moment.
More than 84,000 businesses owe a combined €2.8bn in unpaid taxes from 2020 and 2021 after Revenue suspended collection for companies that were negatively affected by the pandemic.
But those bills, at an average of more than €33,000 per firm, are coming due starting in January 2023.
Firms are being asked to either pay in full or sign up to a low-interest phased payment arrangement – including a lump sum of 25pc – before the end of the year.
For businesses already struggling with spiralling input prices, it could be a tough ask. And if they can’t pay it back, it’s a loss to the State.
But the Central Bank economists who wrote ‘Enterprise policy for distressed businesses’ think it would be a bad idea to forgive any of those liabilities, though, even if they mean hardship for struggling businesses.
They say that letting firms walk away from their tax debts would be inequitable to companies that did not use Revenue’s scheme but are now also dealing with inflationary pressures.
That’s the well-known argument against moral hazard. Ireland certainly knows from its experience with mortgage arrears and the bank bailouts how corrosive it can be to differentiate between types of debtors.
One novel proposal in the Central Bank paper is for the State to consider taking equity stakes in distressed companies
So what alternatives are out there for dealing with debts to the State?
One novel proposal in the Central Bank paper is for the State to consider taking equity stakes in distressed companies that can’t meet their tax obligations. Alternatively, they suggest applying profit surtaxes in future years for companies that are unable to clear back taxes.
These solutions at least offer a clawback mechanism, which is attractive from the taxpayer point of view. The Department of Finance estimates that about a quarter of warehoused taxes simply won’t be paid back.
But the governance issues involved in the State owning bits of SMEs are formidable, to say nothing of the problem of deciding which ventures are viable. In fact, it would require an arms-length management agency on the scale of Nama.
Yet the Central Bank research warns that “the level of latent distress yet to crystallise is potentially large”, with up to 4pc of firms – about 10,000 businesses – in need of restructuring, liquidation or dissolution.
So, the problem can’t exactly be ignored either, But better to ventilate some options in advance than scramble to fix the issue only when companies start going to the wall.
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