On May 24, Collector General filed a lawsuit in the High Court against Mac Interiors, one of the country’s largest outfitters.
Mac Interiors is part of Mac Group Holdings, a Northern Ireland company ultimately controlled by Armagh businessman Paul McKenna. At its peak, the group employed 200 people across his four offices in Ireland and the UK.
Mac Interiors’ latest financial results cover the 18 months to the end of June 2021. At first glance, you can see that the company’s financial position is very healthy. Over the past 18 months he had reported revenues of £116m, capital and reserves. £15.5m, £4m cash.
So why did the tax authorities pursue the company? There were hints in these accounts. At the time, the company paid £5.5m in tax and social security. Like many businesses, it chose to warehouse its tax liability during the pandemic, and was one of tens of thousands of companies to take advantage of the scheme.
Although it was not publicly known at the time, the tax had since ballooned to more than 13 million euros. A forensic report by accountants EY later revealed that the group had been unprofitable on a consolidated basis since financial year 2019, with accumulated losses of around £27m.
In pursuit of revenue, the company sent lawyers to the High Court to secure bankruptcy protection and the appointment of an investigator. The examiner, Interpass’s accountant Kieran Wallace, put together a rescue plan that would save the company but cause great pain to creditors. All classes of creditors supported the proposal. The only exception is the Commissioner of Revenue.
Now comes the interesting part. Generally, the examiner takes a neutral position since the revenue tends to be repaid in full as a priority creditor. However, in this case, because the debt had been in storage for more than 12 months, it was treated as a regular creditor and asked to write off the large debt.
When the proposed arrangement was submitted to the High Court, the Internal Revenue Service opposed it on technical grounds, namely that certain creditors were not correctly classified. The case was won last week when a judge ruled not to approve the application.
Revenue’s appeal may have been technical, but its motivation was more philosophical. First, tax authorities don’t like to be stuffed. The company plans to work with companies to rearrange payment dates and provide flexible schedules, but it is not in the business of canceling debts.
Furthermore, there is still €1.9 billion sitting in tax warehouses, and a successful application by Mack Interiors could prompt many other companies to seek the position of inspector general to evaporate their tax debts. There is sex. That’s why this case was closely followed by accountants, lawyers, and corporations.
A number of lobbying groups called for forgiveness of the warehoused debt, but this was understandably rejected by the government. After all, what message does that send to businesses that have gone above and beyond to pay their taxes during the pandemic?
Therefore, introducing an inspector system to achieve write-downs raised serious concerns among government officials.
Tax authorities have already been forced to write off 85 million euros in debts held in warehouses due to liquidations and companies ceasing to trade. Revenues are determined to keep this number low.
However, the problem of warehouse debt will not go away. The number is too large. At the end of August, it had €1.9 billion in its warehouses, of which €947 million was value-added tax (essentially taxes already paid by consumers).
Approximately 59,500 companies are currently using this system. However, this figure is a bit misleading, as 66% of them have debts of less than 5,000 euros (in fact, the outstanding balance of 49% of all debts in the warehouse is less than 1,000 euros of his ).
The bulk of the debt (€1.62 billion) is held by just 5,900 companies. And it is this group of companies that is most at risk.
And certain sectors are more risky than others. Approximately 16% of outstanding debt is owed by companies in the lodging and food service industry, and a whopping 21% are in the wholesale and retail industry.
The construction industry accounts for 12% of the debt, as do companies engaged in “professional, scientific and technical activities”.
For companies struggling with large amounts of unpaid debt, the proposed Mac Interiors solution may have provided a way forward. And this was the point made by the examiner, who argued that the system was designed to save jobs and keep the company afloat.
Moreover, creditors, including the Revenue, will receive more dividends from the scheme than in liquidation, the court said.
However, for the revenue division, writing off such a large amount of debt was a step too far, as it could have resulted in even more debt for other businesses.
Can a compromise be found? Joanne Cooney, from Byrne Wallace’s corporate restructuring and insolvency team, spoke to Francesca last week and made some nuanced observations.
“The court found that this €13 million revenue liability had not been properly classified. The workaround in this particular case was that ordinary trade creditors could receive euros as dividends as part of one class. If you receive 1 cent, find out that the debt stored in the warehouse of the Revenue Department has become unsecured due to the passage of time. It belongs to its own special class. Therefore, the examiner could potentially be entitled to greater profits.”
“I think that’s a valid argument,” she added. “There is no way that the state’s unprecedented assistance in the custody of tax dollars could have been so thoroughly documented through the inspector general process, even though this was unlikely to be the intention of the government at the time. It was a respite for people and businesses during a time of economic hardship.”
The verdict in this case has not yet been made public, but it may still provide some clarity. However, 1.9 billion euros are still sitting in warehouses, a problem that is not going to be resolved anytime soon.
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