Originally posted on Business Post 6 December 2020.
The exchequer figures published last week confirmed that, as a nation, we are spending vast sums to deal with the consequences of the pandemic. We have spent €10.5 billion more than was planned for in 2020.
The bulk of this overspend, by a considerable distance, was not in the health budget but in social protection, dealing with the fallout from work stoppages and redundancies. Not as much tax materialised as was expected either, but lurking in the background is tax of some €2 billion, deferred from this year and not showing in the exchequer returns but still due from Irish industry.
Not only that, the income tax yield from the self-employed normally shows in November. That wasn’t the case this year, because the tax payment date for most self-employed people was in effect pushed out by a month. Money usually due to be paid in November is not due this year until later this week.
During the Great Recession, tax receipts from the self-employed fell off a cliff by about two-thirds. Because the tax yield from the self-employed reflects the activity of the professional services sector along with many tradespeople and smaller indigenous businesses, it is a real bellwether of the state of the SME sector. We probably won’t know their tax figures, and thus by extension their profitability, until January next. That information will be a real indicator of the resilience of the Irish economy outside our very large multinational and public sectors.
The postponement of tax collection across all businesses has been a characteristic of the government response to the pandemic. Since March, businesses have generally been permitted to defer tax payments initially without paying any interest, and later on (depending on the timing) at a preferential rate of 3 per cent until the Covid-19 tax debt is repaid in full.
This opportunity for deferral of tax payments runs counter to the traditional wisdom that in business, whoever else you owe money to, you shouldn’t owe it to the Revenue Commissioners. For a start, interest on unpaid tax debt normally runs to as much as 10 per cent per annum. Unlike other interest payments, interest on revenue debt is itself not allowable for tax purposes, so for a self-employed person the de facto rate is closer to 15 per cent. The Revenue possesses a particularly sophisticated debt collection mechanism, supported by techniques such as notices of attachment which ensure that a taxpayer’s debtors pay the Revenue instead.
Supporting business through the pandemic by deferring the collection of tax debt, a technique known as tax warehousing, makes sense on several levels. First of all, it allows the government to get money into struggling businesses quickly by the simple expedient of not taking it from them in the first place. Secondly, it has saved the Revenue a lot of effort which might otherwise be misplaced. Why chase struggling businesses for cash which they might not have, when it might be easier to recover more after the worst throes of the pandemic have abated?
Last month Joe Howley, the Revenue’s Collector General, wrote to 100,000 businesses to remind them of the opportunities of tax debt warehousing. This was, no doubt, primarily motivated by a desire to support business through a lockdown. It may have been prompted by the findings of a recent survey conducted by the Department of Finance which suggested that only 60 per cent of SMEs were aware of tax debt warehousing. The mailshot also has a pragmatic edge. Warehousing offers the exchequer a better chance of tax collection in the medium term as prospects improve post-pandemic.
Generally, businesses have been reluctant to get into debt during the pandemic, not wanting to substitute a liquidity crisis for a future debt crisis. Optimism for a better 2021 has to be tempered by Brexit uncertainty and the knowledge that, trade deal or not, trade with Britain will be hampered following the expiry of the transition period next month.
This optimism should be tempered further by the knowledge that the estimated €2 billion or more of warehoused tax debt will ultimately have to be settled. There is no need for businesses availing of the tax warehousing facility to panic, but they do need to start thinking about how the debt will be repaid or refinanced.
It is clear from the November exchequer returns that, insofar as possible, Irish business has been doing the right thing throughout the pandemic. Tax yields may be down, but it is evident that many businesses kept paying their way as best they could during 2020. There is now a reasonable expectation of some upturn during 2021 which, in turn, will lift the national finances.
The business resilience shown during 2020 deserves some reward. It might start with the government helping to refinance, or even forgive, some of the €2 billion in warehoused tax debt.
Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland