Fears Inland Revenue laxity has primed 'tsunami' of business failures

Is a "tsunami" of business failures on its way? Photo / Getty Images

The insolvency profession has sounded warnings that a long-running decline in Inland Revenue debt enforcement action - that slumped further to help mitigate Covid economic fallout - may be helping to prime a coming "tsunami" of business failures.

Formal business failures - the appointment of liquidators to an indebted company by unsatisfied creditors - have been in steady decline for the past 10 years. An analysis of such applications notified in the Gazette by the New Zealand Herald shows this trend has been largely driven by a dramatic decline in formal debt enforcement actions by the taxman.

Ten years ago Inland Revenue were applying to liquidate around 70 companies a month over unpaid taxes, but by 2019 this figure had halved. During the middle of 2020, in the panicked early days of Covid, Inland Revenue's debt enforcement action through the courts plunged further and was up to 80 per cent down on rates a decade ago.

Inland Revenue is understood to be the country's largest debtor, and traditionally has initiated the bulk of liquidation actions taken through the High Court. Private sector debtors account for the remainder.

Ten years ago Inland Revenue accounted for two-thirds of all liquidation proceedings, but over the past two years has seen its share shrink to less than half.

Despite being provided data and a week's notice, Inland Revenue declined to be interviewed by the Weekend Herald about these findings and would answer questions only through written statements.

"There has been a series of influencing events and circumstances that have progressively diminished the number of liquidation applications over time," a statement attributed to Inland Revenue's Richard Philp said.

Philp said outstanding tax debt levels had not blown out over the period in question, and rejected any suggestion of growing laxity in Inland Revenue enforcement.

"The way our approach to tax debt and its impact on liquidations is not a matter of 'getting soft' on debt. It has been a process of improving our ability to help businesses manage their tax debt situations early and avoid getting into payment difficulty," the statement said.

Several insolvency specialists, who acknowledge a professional interest in increased liquidations and declined to speak openly as they regularly worked with Inland Revenue, said the taxman's traditional role as a liquidator of first and last resort - effectively gatekeeping the business community against insolvent operators - was being neglected.

"They've got to turn this enforcement activity on again, for two reasons. One is just to collect more tax for government to pay for the Covid response. The other is about the integrity of the tax system: They've got to go after those taking the piss," one said.

Waterstone Insolvency principal Damien Grant said the decline in enforcement action created a void in market information about peer solvency, and may even lead some business operators to conclude that "not paying tax is a rational decision".

Brent Norling, principal of boutique insolvency firm Norling Law, said he had found - particularly over the past two years - IRD more willing to settle with terms that were relatively advantageous to his clients. He said settlements struck were now including writing off not just interest and penalties, but also some core tax debt.

He said this state of affairs could not be continued indefinitely, as business entropy would inevitably assert itself - with interest. On how he saw the near future, Norling said; "I'm expecting a tsunami to be frank."

"There were a lot of businesses who were insolvent towards the end of 2019 - then Covid happens, and since then they've continued to trade and increased their indebtedness.

"I don't know precisely when that tsunami will arrive, but I do expect there will be one because of the amount of insolvent companies out there continuing to trade. It will probably arrive when the IRD start doing enforcement again."

While liquidation rates remain at near-historic lows, there are hints in the data about future trends. After the lockdown of 2020, during which Inland Revenue enforcement action seems to have largely paused, activity by the taxman in the courts surged to levels not seen since 2017. But the arrival of Delta in later 2021, and then Omicron, saw the brakes go back on again.

Inland Revenue's Philp, while unwilling to put a number on where things would end up, acknowledged there was only one direction for the figures to go: "We also expect that the current situation will change again as and when it becomes apparent that various businesses increasingly show that their future viability diminishes".