Sustain small businesses and they will sustain us

Aug 06, 2020

 

Originally posted on The Business Post, 5 July 2020

International associations have not fared well during the Covid-19 pandemic. The EU's approach to tackling the crisis has been (to put it charitably) fragmented because it does not have a core role in health matters, and the G7 group of the world’s richest nations couldn't come up with a joint declaration on the emergency in March, apparently because Mike Pompeo, the US Secretary of State, insisted on referring to the coronavirus as the “Wuhan virus”.

Tax receipts for the first half of 2020 are higher than expected, thanks to state supports for SMEs – and keeping those in place will be key.

Judging by the tax receipts published last week for the first six months of 2020, Irish business presses on. This is despite all reasonable assumptions, based on so many of us either being out of work or working in struggling businesses, that things are grinding to a halt. More tax was collected in the first six months of this year than in the first six months of last year, according to the exchequer figures published on Thursday.

Not for the first time, the unexpectedly high tax receipts are in part due to high corporation-tax receipts, described in the exchequer statement as “volatile”. I'm not aware of any dictionary which defines “volatile” as marked by a consistent pattern of growth over a decade, which is what has happened here.

It is often pointed out that 40 per cent of all corporation tax receipts comes from ten large companies anchored in the multinational sector. Less frequently highlighted is that 60 per cent of the corporation tax receipts haven’t come in the past from this exalted cohort. If this trend has continued, it would seem that many Irish businesses are continuing to operate successfully during 2020 – 60 per cent of a very large number is still a very large number.

Once a company gets over a certain size, its corporation tax bill becomes, in effect, a real-time tax. Payments are based on current rather than on historic profit levels. If corporation tax receipts are strong – and this month they have been unusually so – it means that many businesses are performing well in many areas of the economy. In addition, the big multinational players are governed by corporation tax reforms introduced in many developed countries over the past decade.

These reforms mean that it is increasingly difficult for companies to shut up shop and relocate simply for tax reasons. The level of corporation tax receipts shouldn’t be just dismissed as being further evidence of a perfidious tax haven economy, as so often happens. Rather they can be a useful indicator of the current commercial activity taking place in a country. The money is welcome too.

We don’t have reliable signals for Vat this month as Vat payments only come through every two months, but the employment tax figures show a mixed picture. Income tax receipts are 20 per cent down from the same month last year even though the PRSI receipts are a little up. The key point here though is that 80 per cent of the income tax is still being collected, and this may reflect the emerging pattern that lower-paid workers were the most vulnerable to losing their jobs. The vast bulk of income tax receipts comes from higher wage earners.

Last week’s exchequer figures reflect what was actually collected, rather than what was due for payment during June. At present, businesses are permitted not to pay over the PAYE they are withholding from their employees, without interest or penalty, under the so-called tax warehousing arrangements.

Revenue figures from last month suggest that some €650 million in PAYE liabilities has been warehoused in this way so far. This is a significant sum, but it is only about 2 per cent of the total which might be due for collection from the national payroll throughout the year. Clearly many businesses still have considerable reserves or are sustaining a reasonable cash flow to meet their tax obligations.

We know from the last recession that it was the need to borrow over successive years to fund welfare and public services that grew the national debt because tax revenues were insufficient; the cost of the bank bailout was not the main component. The evidence now is that, unlike the last time, we can avoid tax revenues drying up by using supports such as the temporary wage subsidy scheme. This scheme is an employment-related grant for industry and must be continued. If we can preserve the tax stream by continuing to plough money into industry with grant aid, the cost of doing so in 2020 could pale into insignificance when compared with having to fund social welfare and other supports over many subsequent years.

Sustaining business activity and encouraging growth to reduce the need for future state supports is key, particularly for the SME sector. The July recovery package being promised by the new government must look to manage future government expenditure by ensuring that businesses rehire to fill the jobs that were lost as soon as possible. We had virtually full employment as recently as March, and we need to get back to that.

The two ministers at the helm of Finance and Public Expenditure and Reform will hopefully recognise this and keep the business supports in place as they formulate the July stimulus package. If they can keep Irish business moving, employment will recover and everything else should follow from that.

Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

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