From the start of the coronas crisis, the Tax Authorities have come to the aid of entrepreneurs by providing a payment scheme in the form of a special tax deferral, as part of a broad government support package. But what impact does this scheme have on corporate finance issues, such as the purchase or sale of a business, the valuation of a business or the raising of new finance?
A brief refresher of the scheme. Under the scheme, companies can apply for a deferral until 1 October 2021 to pay their taxes. The scheme applies to corporate income tax, sales tax (VAT), and payroll tax, among other things. The amount on which a deferral of payment has been obtained must be repaid over a period of 5 years from October 1, 2022 (the assumption is that the debt is repaid on a straight-line basis). Collection interest must be paid on the resulting debt. This interest was temporarily reduced to 0.1% per year in 2021, but will increase to the old level of 4% per year over the next few years.
When a company is bought, sold or valued, the so-called 'debt and cash like items' are adjusted to the enterprise value in order to arrive at the value of the equity. Receivables from and debts to the tax authorities are normally part of the net working capital position and, provided this position is appropriate, are therefore not usually classified as a debt and cash like item.
However, given that the payment term of the deferral scheme differs from a normal payment term and, moreover, can involve relatively large sums, buyers or valuers will often include the enterprise's debts to the Tax and Customs Administration to the extent that these relate to the corona-related payment scheme as a debt, resulting in a lower value of equity. When buying, selling or valuing a business it is therefore important to look closely at the various receivables from and payables to the Tax and Customs Administration and to break these down into 'going concern' components versus non-recurring debt-like components.
In addition to the tax deferral scheme of the tax authorities, the NOW scheme can also lead to a 'debt and cash like item'. This can be the case when the final calculation under the NOW scheme leads to a different subsidy amount than the advance received. If the amount of the final calculation is lower (or is expected to be lower) than the advance payment received, this leads to a debt item that has to be deducted from the enterprise value.
However, the reverse can also happen under this arrangement, namely when the (expected) final calculation is higher than the advance payment received. This should then lead to a 'cash like item' that has to be added to the enterprise value.
The debt which has arisen as a result of a tax deferral or a different calculation under the NOW scheme may also play a role in financing issues. The repayment and interest payment on the debt to the Tax Authorities or the UWV will in any case lead to a lower cash flow which is available for, among other things, investments and the repayment capacity of other debts. Another question is how banks deal with this tax debt when providing (new) financing. This is certainly the case in certain sectors where the debt compared to the operating result is high.
"The Tax Office's deferral scheme and the NOW scheme can have a direct impact on the value of equity."
The corona debt to the Tax Authorities or the NOW repayment results in a higher credit risk for banks and other lenders. The debt may also be included in the calculation of financial covenants. If the credit margin is linked to a financial covenant, this may in turn lead to a higher credit margin. Although we expect banks to show some flexibility in this respect, given the social situation, the risk has increased.
Another interesting aspect of this scheme, and more broadly all corona-related aid packages, is the variation of schemes between countries. This is because there is a great deal of variation in the size of the aid packages between countries. Rabobank research shows that developed countries in particular have significantly increased their government spending in 2020. The countries at the top of the list are the United States, the United Kingdom and Canada. These countries increased their government spending as a percentage of GDP by about 15% between 2019 and 2020.
The Netherlands scores considerably lower with an increase of around 7%. Large differences between the amount of support received by companies in different countries can affect the competitive position of companies. As an entrepreneur, it is obviously difficult to compete when your competitors have received much more government support simply because they are based in a different country. A good example of this is Ryanair. In the past year, they have initiated legal proceedings against various national airline companies (including KLM) that have received billions in support from their governments, while Ryanair did not receive such support.
In conclusion, when buying or selling a business the deferral scheme of the tax authorities and the NOW scheme should be taken into account. These schemes can have a direct impact on the value of the equity. The schemes should also be taken into account in the case of (existing and new) financing.
Although the schemes can provide relief from liquidity problems, there may be a negative impact on (attracting) financing. Finally, the conditions of the support packages may differ between countries and this may affect the competitive position between companies.