One of the key measures introduced is the suspension of debt collection and charging of interest on late payment of VAT and PAYE (payroll tax) liabilities due from March. While this is a very welcome cash flow measure for businesses, there remained uncertainty as to how and when this level of tax debt forbearance would be unwound, with concerns regarding how businesses could trade their way back to profitability and repay the amounts due.
On 2 May 2020, the Irish Government announced a suite of measures to further support small, medium and larger business that are negatively impacted by Covid-19. One of these measures was the introduction of “warehousing” of tax liabilities for a period of twelve months after recommencement of trading during which time there will be no debt enforcement action taken by Revenue and no interest charge accruing in respect of the warehoused debt.
In the normal course, Revenue would work closely with businesses to put in place arrangements, appropriate to the circumstances and viability of each business, to secure payment of those debts over a reasonable timeframe. However, in the current circumstances, businesses that have had to close, or have been significantly negatively impacted by the restrictions, will not be able to enter into arrangements now or in the short term to clear the Covid-19 -related tax debt, while at the same time face the challenge of paying their ongoing tax liabilities as they arise after they reopen; pay their trade and other non-Revenue creditors; complete any necessary restructuring to deal with new trading arrangements in the context of social distancing; build up stock, etc.
The “Warehousing” Arrangements
The tax debts covered are VAT and PAYE debts from the “Covid-19 restricted trading” period. These are the tax debts that have been subject to the suspension of debt enforcement, as discussed above.
There will be three periods in the scheme:
Period 1 – Covid-19 Restricted Trading Phase
The relevant tax debts built up while the business is unable to trade or was subject to restricted trading, and debts for an additional two months after the business re-commences ‘normal’ trading, will be ‘ring-fenced’. There will be no collection of any of the debt in question during this period and no interest will apply, but the debt will have to have been quantified by the business through the filing of all the relevant returns for the restricted trading phase. If a best estimate return of liability has been made for any period, the correct return will have to be filed before the end of Period 1 to ensure that the debt benefits from the warehousing.
Period 1 may vary from sector to sector and business to business, depending on when Government restrictions are relaxed in line with the roadmap for re-opening society and business as announced on 1 May 2020.
Period 2 – Zero Interest Phase:
Following a resumption of ‘normal’ trading, the outstanding VAT and PAYE (Employer) tax debts will be warehoused for 12 months during which there will be no collection of this debt by Revenue and no interest will be charged. However, businesses will be expected to pay current liabilities as they arise during this 12-month period.
Period 3 - Reduced Interest Phase:
At the end of the ‘warehoused’ 12-month period, a reduced interest rate of 3% will apply on the repayment of such warehoused tax debt until it is fully paid. This compares to a rate of 10% per annum currently charged on overdue VAT and PAYE (Employer) tax debts.
Other Points to Note
In order to avail of the scheme, the tax debt will have to be quantified by the business through the filing of all relevant returns for the restricted trading phase. If a best estimate return of liability has been made for any period, the correct return will have to be filed to ensure the debt benefits from the warehousing.
Tax debts before and after the “Covid-19 restricted trading” period are not included in the warehousing arrangement. Businesses experiencing difficulty in meeting their payment obligations in relation to such liabilities should engage with Revenue to make suitable arrangements for the discharge of these debts.
Revenue has confirmed that Tax Clearance will not be affected by a business availing of tax debt warehousing under this arrangement.
Refunds and repayments of tax which arise will also be paid, notwithstanding that the business owes VAT and PAYE (Employer) liabilities that have been warehoused. However, a business can choose to offset the repayment against the warehoused liabilities if it wishes.
The necessary legislative amendments are expected to be contained in Finance Bill 2020. In the meantime, Revenue will operate the scheme on an administrative basis.
BDO Ireland is here to support you and your business through these unprecedented times. If you have any questions on this matter or how it affects your business please contact your usual BDO tax contact or a member of our Tax team.