Businesses cannot engage in fiscal distancing

Mar 30, 2020
Originally published on Business Post, 22 March 2020

We are all struggling to become used to social distancing, but there is no such thing as fiscal distancing. When almost nothing else works as normal, the tax system does. The additional burdens which coronavirus is placing on the exchequer, due to increased social welfare payments and emergency care measures, will not be offset by tax revenues – in fact, quite the opposite.

While often it is the tax paid (or not paid) by wealthy individuals and multinationals that captures the headlines, the bread-and-butter of exchequer funding is the Vat and PAYE collected by the business community throughout the year. Last year one in every four euros of tax collected was Vat and it was the second largest source of money for the exchequer.

Generally, Vat is paid over every two months and the Vat collected by businesses on sales during January and February is due tomorrow. Vat is primarily a consumer tax, and the bill could be large. We still ate in restaurants, drank in pubs, bought cars and clothes and attended events during January and February.

Many businesses have a PAYE bill due this week as well, reflecting payroll deductions during the month of February on wages paid before the layoffs and closures we have seen in the past fortnight. Vat and PAYE together make for a big tax bill and a cash-flow challenge.

There are two fundamental aspects to tax compliance – the payment and the tax return. While the payment is usually the main concern, it is in fact the tax return which can land a taxpayer into serious trouble. Incorrect, late or missing tax returns result in people being fined or penalised or ending up in court or being published on the list of tax defaulters. Late or missing payments on the other hand are mostly pursued using routine debt recovery methods, so the best advice for any business facing problems with tax payments is to make the tax return anyway and worry about the payments later.

The Revenue has signalled this week that it will waive interest charges on late payments of Vat and PAYE for businesses with a turnover of less than €3 million. This is an unprecedented departure from its usual policy. Normally, as Donald Tusk might have observed, the Revenue reserves a special place in hell for businesses who default on Vat and PAYE, on the basis that this money has already been recovered from their customers and employees and should be paid over to the Revenue forthwith. Not even during the crash in 2008 did thebRevenue offer any succour like this for businesses.

Another step in the right direction is the application of the new PAYE real time system to ensure that workers laid off due to the coronavirus crisis will get their social welfare benefit of €203 per week as quickly as possible. This column has griped in the past about the cost to employers of implementing Revenue-compatible payroll software to make the new PAYE system work, so it is good to see some return on that outlay. Participating employers will be able to pay the emergency social welfare benefit of €203 per week and expect to recover the amount from the Revenue within a matter of days.

Terms and conditions apply, because we must recognise that this benefit is to facilitate the rapid payment of social welfare benefits to people who have been laid off as a result of the coronavirus epidemic. It is not an opportunity for payroll substitution, or for manipulating figures, or for taking on ghost employees. Again, to channel Donald Tusk, there should be a special place in hell reserved for anyone trying to game any system which has been established to help workers and their employers deal with this calamity.

The current fall off in tax receipts is a result of the evaporation of demand – for fuel, for services, for goods. Because of this we can expect monthly exchequer receipts to fall by hundreds of millions every month over the coming months. It's another compelling argument, even if one were needed, for social distancing. The shorter the crisis, the sooner demand will return, and the less damage will be done to the economy.

While the bank bailout is often blamed for the surge in the national debt following the Great Recession in 2008, most of the debt was racked up by the decision to continue paying social welfare benefits and provide services during years when the tax revenues simply weren't there to support them. This is now happening again, but our tax yield is better shielded now than it was in 2008. For one thing, we are less reliant on capital taxes. It may even work out in our favour that corporation tax receipts are derived from a relatively small number of multinationals operating in industries which might not be as badly affected by coronavirus as some others.

For many businesses facing tax bills this week, though, the advice is simple. Make sure the Vat return is made to the Revenue, and that your PAYE system is accurate and up to date. If necessary, worry about the payments later. You cannot do fiscal distancing.

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