Tax warehousing and the danger of deferred debt in your business

Tax warehousing and the danger of deferred debt in your business

Increased debt limits funding options and threatens the hospitality sector

Tax warehousing and the danger of deferred debt in your business
Speaking at Crowe’s recent Budget 2022 Briefing webinar, corporate finance partner Aiden Murphy outlined the potential funding challenges facing a business that has availed of tax warehousing. 

Aiden explained that banks would see the warehoused tax as another loan with a similar or possibly greater priority to any bank loan they might advance. Therefore, when looking at a business’s repayment capacity and ability to service any debt the bank may be willing to approve, they would look at the cash flows after the tax warehousing payment obligation was made. 

As the amounts for VAT and payroll taxes warehoused during the COVID-19 restriction periods could be significant, paying them back over 2023 and 2024 could represent substantial monthly outlay and so limit the headroom in cash flows needed for bank loan servicing. Therefore, if businesses with warehoused tax are looking to borrow from the bank, they need to consider now the likely repayment obligations to Revenue even though they will not kick in until 2023. Furthermore, while the warehoused loan is efficient in that it is interest-free for now, if a business has an expansion opportunity for which it needs to borrow in 2022 or 2023, they should consider rolling the warehoused tax into the overall term of the new loan. This could maximise funding availability as the tax liability is then spread further into the future and monthly capacity to service the new loan is improved in the short term.

Aiden, who works extensively with hospitality businesses, was also asked to comment on whether he felt the extension of the EWSS to the end of April 2022 was enough to sustain businesses in the sector after the impact on their trade from the pandemic.

Next year will be challenging for the hospitality sector as it faces a series of cash flow demands which will put liquidity under pressure. These include full commercial rates returning from 1 January 2022, the requirement to pay current VAT and payroll taxes from February 2022, the tapering of the EWSS to a much-reduced value in March and April 2022, the imposition of full employer’s PRSI from 1 May and the increase in VAT on rooms and food from 9% to 13.5% from 1 September 2022. 

Aiden’s concern is that for many hospitality businesses, these liquidity challenges may be too great and by the end of 2022 some businesses may need to consider closing or selling to deal with their debts. 

Such an outcome could be avoided with a little extra latitude from the government on supports in 2022 for businesses whose trade is recovering more slowly than others. This could be the saviour for many struggling businesses in the hospitality sector as the extra cash flow would help nurse them back to going concern status and the extra cost of doing so would probably not be significant.

For the right advice on how best to ensure your business is protected in terms of having adequate liquidity and implementing good cash flow management fundamentals, your next move should be a call to Crowe. Please contact the head of Crowe’s corporate restructuring and insolvency team, Aiden Murphy to arrange an appointment.