Mechanism in Small Company Administrative Rescue Process (Scarp) is putting off struggling businesses from availing of debt restructure service, expert says
The Small Company Administrative Rescue Process (Scarp), which has been used to save the likes of food brand Fiid and Waterford’s Blackwater Distillery, is a rescue mechanism for small and medium-sized businesses.
Scarp was introduced as an affordable framework to help small, viable firms in financial difficulty restructure their debts and avoid liquidation.
Revenue is often the largest creditor of SMEs applying for Scarp, making its support crucial to the process
Currently, Scarp includes a mechanism that gives Revenue a structured right to opt out.
Revenue said the opt-out is not a veto, describing it as a legal safeguard to ensure the integrity of the process is not misused to evade tax liabilities. Reasons for use can include a history of non-compliance or poor compliance, an ongoing audit, or an active tax appeal.
Revenue is often the largest creditor of SMEs applying for Scarp, making its support crucial to the process.
James Anderson, a partner at Deloitte Ireland specialising in restructuring, said the opt-out was affecting the take-up of Scarp. Last month, Deloitte released a report showing only 23 companies utilised the Scarp scheme last year, a decrease of 23pc.
“Scarp was brought in to increase restructuring activity,” he said. “It is not working, the numbers aren’t coming through.
“The numbers are aligned with examinership, and there is so much uncertainty with Scarp, and it has the opt-out for Revenue, which basically means people aren’t taking it up because it is of limited value.”
The concept of Scarp was good in that it should be more affordable, quicker, but in practicality, it is not working
Anderson said Scarp needed to be changed so more companies can take advantage of what is typically a faster, more affordable process than examinership.
“The concept of Scarp was good in that it should be more affordable, it should be quicker, but in practicality, it is not working. It is not getting the take-up.
“It needs to be changed, it is not getting the take-up,” he added. “There can be no doubt that creditor opt-out is affecting take-up. The numbers say Scarp is not working.”
A spokeswoman for Revenue said legislation provided the tax agency with a structured opt-out right.
The agency’s core objective regarding Scarp is to “work constructively with financially distressed companies and their process advisers, while maintaining safeguards that protect the public interest”.
“Since Scarp was introduced in December 2021, Revenue has been a constructive participant, with the vast majority of companies meeting the inclusion criteria,” Revenue said.
“There have been approximately 100 applications for Scarp, of which Revenue has opted into over 80pc.”
Deloitte’s report forecast 900 insolvencies in 2026, up from 812 last year. SMEs accounted for the majority of insolvencies last year, highlighting the impact of higher business costs.
Anderson said stress would continue for some SMEs in hospitality, retail and construction.
Brendan O’Reilly, MD restructuring at Interpath Advisory predicted a slight increase in insolvencies this year
Brendan O’Reilly, managing director of restructuring at Interpath Advisory, also predicted a slight increase in insolvencies this year. He believed sectors such as retail, hospitality and technology would be most affected.
O’Reilly said many technology startups found it easy to raise money during and immediately after the pandemic.
However, if they hadn’t yet scaled up and gone to market, investors were becoming more cautious about continuing their backing.
“Even though there is a lot of money in the economy, I don’t think the funders are releasing that money as easily,” he said. “There will potentially be more fallout in the tech sector, in those start-up companies.”
O’Reilly also said Scarp was underutilised, adding that it was good for dealing with legacy issues rather than cashflow pressures.
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