Keep it simple

Aug 06, 2020

 

Originally posted on the Business Post, 17 May 2020 

Coronavirus is decimating employment, but tackling it is now creating a whole new industry of its own.

The complexity of existing support, solutions and proposed solutions is multiplying by the day.  There is at least a dozen state supported funding options announced, from the Covid-19 working capital scheme to the SME credit guarantee scheme.  These are worthwhile incentives in their own right.  Nevertheless, for many business owners struggling to deal with the day-to-day practicalities of handling a collapsing business, the range of options, terms and conditions can be bewildering.  

Even the most effective government support for business currently on offer, the temporary wage subsidy scheme, is becoming bogged down by the weight of its own complexity.  The guidance notes for employers operating the scheme have mushroomed.  The short “Frequently Asked Questions” guide which was issued by Revenue in March is now over 60 pages long after weeks of adding extensions, clarifications and examples.  

Currently one of the best supports for business is the temporary suspension of collection of PAYE and VAT.  It has the virtue of simplicity.  VAT and PAYE do not “belong” to a business.  They are collected and transferred to Revenue on behalf of consumers and workers.  If you're a small business, you just don't pay over the PAYE and VAT due this month or next month.  If your turnover is in excess of €3 million, you just need to let Revenue know that you intend to postpone payment.  

Given that the national payroll before the current slump was heading towards some €100 billion euros, and that on average, PAYE takes out approximately 15% of that, there can be no doubt that deferral of PAYE currently being planned means a very substantial contribution to the cashflow of employers but at a heavy cost to the State.  

VAT is different in that ultimately it is a consumer tax.  Depending on the product or service, VAT can add 13.5% or 23% to the purchase price.  Much of it is collected by retailers and businesses providing services to private consumers.  If the priority is to target the SME sector, VAT relief is particularly effective as we saw with old the 9% VAT rate for hospitality.

The plans to extend the current PAYE and VAT deferral arrangements, still to be fleshed out in any great detail, involve PAYE and VAT “warehousing”.  The term warehousing suggests something being put into storage for access at a later stage.  However, are there situations where the collection of the PAYE and VAT should not just be postponed, but rather forgiven altogether?

In the US there is a loan scheme for businesses damaged by the Covid-19 response known as the Paycheck Protection Programme.  Loans are given to employers for a two year term, at a 1% rate of interest.  In many cases the loans will be forgiven in full or in part, depending on the employer maintaining or quickly rehiring employees and maintaining wage levels.  $200 billion of such loans to 2.6 million businesses have already been approved.

The prospect of having the loan written off creates a huge incentive for businesses to sustain employment and manage their way back to financial health.  The arrangement also removes much of the risk (if not the cost) from the official point of view, because ultimately it’s a form of grant aid for businesses who have shown they put this state support to best use.

A similar approach could be taken with the PAYE and VAT warehousing proposals here.  As well as deferring tax payments, businesses that maintain employment levels could be forgiven some of the VAT and PAYE due in the warehouse.   In this way, we rebuild our industrial base first by easing cashflow, and secure it then by further boosting employers who have best managed the consequences of the pandemic.  

There is no doubt that this US style approach would be costly, but the potential for saving on social welfare benefits for the unemployed is significant.  No matter what happens, Covid-19 is going to cost the country a lot of money.  Is it better to spend that money on providing employment or providing welfare?

Perhaps this type of solution is too straightforward.  Industry and officialdom alike have become familiar with complexity to the extent that we become suspicious if complexity is absent.  The business lobby must take its share of the blame for this attitude.  IBEC’s Reboot and Reimagine campaign launched earlier this week is an impressive piece of work, and has much to recommend it.  Simplicity however is not among its attributes.  It's hard to disagree with much of its content, but the range and nuances of its asks challenges how quickly those requests could be acted upon.

Because of the rapid fall-off in activity, many business operators don’t have the time or the expertise to work through what supports they can or should avail of.  Few want to borrow, no matter how low the interest rate, no matter the moratoriums or guarantees, when their business model is in collapse.  

We need simple and quick supports to cope with Covid-19 unemployment crisis, not a complex new industry of loans, grants, tax breaks and deferrals.

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