Brian Keegan: Ending tax warehousing coupled with high energy bills may be last straw for many businesses
Preparing Crisis For Flow Warehoused To Repay Tax Is Energy The A Their Cash Bills Creating Businesses Dilemma
There is an unusually close integration in this country between the tax system and business activity. Not every country insists that individuals and organisations are fully tax-compliant before they can do business in the first place.
A process known as tax clearance ensures that taxes are paid and tax returns are filed up-to-date before any government work is awarded to a business, or before any permits or licences are issued. The sale of fuels and liquor and the operation of restaurants are among the many activities which can only be carried out legally with a licence. A licence will only be granted if a tax clearance certificate issued by the Revenue Commissioners is produced.
So far, so routine. Until now. During the pandemic, businesses were offered the chance to postpone payment of taxes due to help with their cash flow during the lockdowns and restricted trading conditions. This was a valuable benefit and many smaller businesses availed of it. The tax debt was not extinguished, but rather deferred or “warehoused”.
The tax warehouse is now being closed. Over the next six months, some 80,000 businesses will have to make arrangements to settle the postponed debt with Revenue and agree a phased payment arrangement. The big advantage of a phased payment arrangement is that interest on the unpaid tax will be charged at a preferential rate of 3% rather than higher rates of up to 10%. But the problem crystallising for many businesses now is that unless a phased payment arrangement involving a payment of 40% of the warehoused debt can be agreed with Revenue, the entitlement to a tax clearance certificate will be withdrawn.
In normal circumstances making an upfront tax payment of that order would be a challenge, though not an insurmountable one.
There are reasons for the Revenue's insistence on a substantial upfront payment before granting a tax clearance certificate. The tax warehousing scheme was a complete departure from the normal tax collection and enforcement regime and undoubtedly helped many businesses survive during the pandemic. That said, not all businesses availed of it. An overly lenient approach now in agreeing a settlement of warehoused tax debt or even perhaps offering some debt forgiveness would in effect offer a competitive advantage to those businesses which had availed of the scheme over those businesses which had struggled through and paid their taxes regardless.
Difficulties being experienced now when paying taxes do not augur well for the future financial health of the individual or organisation concerned. Unpaid tax debt is often a feature in a business cessation. A decade ago the Committee of Public Accounts found that in the 10 years to 2009, in excess of €1bn in VAT, PAYE and other taxes had been written off by the Revenue when companies went into liquidation. That type of scenario will not be repeated.
There are no easy solutions for businesses caught in the current dilemma. It is possible to construct a business case when applying to Revenue for a phased payment arrangement to explain why a 40% upfront payment cannot be made. Yet for some businesses, unfortunately, the closing of the pandemic tax warehousing support coupled with higher energy costs may be the last straw.
Brian Keegan is Director of Public Policy at Chartered Accountants Ireland