Coronacrisis

The ending of the Temporary Wage Subsidy Scheme will be a shock to the system for thousands of small firms, writes Nick Mulcahy

As the never-ending Covid panic rolls on, termination of the Temporary Wage Subsidy Scheme will be a financial jolt for thousands of small and medium enterprises

It wasn’t supposed to turn out like this. When a national lockdown was decreed by Leo Varadkar nearly six months ago, to suppress the spread of the coronavirus, the hope was that once suppression was achieved then society could open up again. The disease was suppressed, hospitals coped with Covid-19 patients, and deaths from the disease have slowed to a trickle.

Yet the suppression strategy continues, and officials whose pay and pensions are immune to Covid-19 effects continue to spread anxiety and alarm. So much so that public witch hunts are instigated to hunt down individuals who break public health guidelines, gatherings at public and private events are scaled back again and, most bizarre of all, citizens are advised not to travel on socially distant public transport.

The giddy excitement of dropping out of the rat race during the sunny days of April and May, while the state filled up workers’ bank accounts, is rapidly dissipating as autumn closes in. A choke is being applied to the flow of free money at a time when consumer confidence is on the floor. It won’t bounce back until political leaders face down the medical and academic zealots, and there’s no sign of that happening.

The official data that has emerged since lockdown commenced tells a tale of two economies in Ireland. On the one side are the overseas and Irish multinationals and their supply-chain whose activities are not dependent on non-food retail, travel, hospitality and tourism. Because of these mainstays, tax flows into state coffers for the January to July 2020 period were on a par with the same period in 2019.

Most striking is that the Income Tax yield in the seven-month period this year was almost identical to the yield a year earlier. This points to the fact that medium and high earners pay most of the Income Tax collected, and their earnings seem to have been largely unaffected by Covid-19.

Then there’s the other economy represented by the c.70,000 employers availing of the now concluded Temporary Wage Subsidy Scheme (TWSS). Through August c.370,000 workers were benefiting from this subsidy, and 650,000 employees received a TWSS payment at some stage since March. This low-pay economy also includes the 230,000 individuals claiming the Pandemic Unemployment Payment at the end of August, and the 245,000 individuals on the Live Register.

PUP is another form of dole payment, so that’s 475,000 people officially out of work compared with 200,000 before the pandemic. The question now is what happens to the 370,000 individuals who were on TWSS life support. Most of them will stay with their employer, at least for the moment. However, unless trade picks up in the social economy that depends on people travelling and mingling, then a chunk of the TWSS

NPHET’s crazy lockdown has prevented c.3,500 pubs from trading for nearly six months. Among the affected bars is Moynihan’s Bar in Donard, Co. Wicklow, run by Anna Clarke Moynihan and her husband Paul

cohort are heading for the dole queue too.

It was great while it lasted but now the Temporary Wage Subsidy Scheme is gone. Never before in the history of Irish business did the state turn around to its commercial serfs and tell them, ‘Tell you what, we’ve been bilking you for tax since time immemorial – now have some back’.

The TWSS was an extraordinary construct, introduced in the last week of March 2020 to compensate employers because their business had either been shuttered completely by official order, or their trade had been decimated due to lockdown effects on the economy. The design had never been effected before. Operated by the Revenue Commissioners, TWSS paid employees a subsidy based on their average net weekly earnings, and the lower the pay the larger the subsidy.

Employees earning up to €24,400 p.a. received a subsidy of 85% of their previous net weekly pay. For people earning €24,400€31,000 p.a. the subsidy was a flat rate of €350 per week, and for people earning €31,000-€38,000 p.a. the subsidy was fixed at 70% up to a maximum of €410 per week. There was a tapered subsidy for earnings between €38,000 and €76,000 p.a., up to a maximum of €350 per week, and nothing for earnings above that level.

A feature of the TWSS design was that the subsidy amount in each payroll was linked to the salary payment being paid by the employer to the employee. If the employer paid in excess of

what it had been paying in a staff salary in January and February 2020, then the subsidy element decreased by a corresponding amount.

Though the TWSS wasn’t much use to aircraft-leasing companies, it was of enormous benefit to employers with staff on low to middle incomes. Employer cashflow was also boosted by Revenue’s decision not to levy income tax, USC and PRSI on the subsidy element of the individual’s pay. In effect, taxable gross pay for employees in small firms was halved, and with normal tax credits kicking in there was minimal employee tax for the employer to remit to Revenue every month.

The kicker is that the income tax, USC and PRSI not collected on the subsidy element of salaries will be collected at a later date. This will cause headaches for TWSS participants at some point in the future. In Revenue’s defence, the TWSS rationale was to help employers navigate a sudden shock to their turnover, and in that regard it succeeded.

When the Temporary Wage Subsidy Scheme was first announced, it was supposed to run for twelve weeks to June 18. Then reopening timetables were delayed and government decided to let TWSS run for another ten weeks to the end of August.

A feature of the scheme is that as businesses were allowed to re-open, people who had been laid off and were claiming PUP started work again with the benefit

of TWSS. Since Phase 1 reopening on May 18 to the end of July, 120,000 people moved from PUP to TWSS employment. This has ensured that state outlays on the TWSS haven’t reduced much over time, and the gross cost to the state was c.€600m a month or c.€3 billion in total.

That’s a lot of free money for firms not used to getting any, though the downside for the Exchequer isn’t quite so stark. For a start, the unpaid income tax, USC and employee PRSI clawback will be sizeable. Secondly, the TWSS is paid from the Social Insurance Fund, and companies registered for TWSS paid €450m employer PRSI into SIF from January to May 2020. NonTWSS employers paid €2.2bn employer PRSI into SIF in the same period. Normally this PRSI tax on business goes to fund state pensions and other welfare benefits, and for once business has been getting something back.

The new Employment Wage Subsidy Scheme is a different animal entirely to TWSS. The bar has been raised for qualification, with claimant companies having to expect a 30% or more decline in year-on-year sales through H2, up from the 25% decline threshold in TWSS. The maximum weekly subsidy has reduced to €203 a week, the same as the dole payment, and the subsidy will be paid in arrears unlike the almost simultaneous TWSS bank transfer to employers.

Employers on the scheme have to revert to paying their payroll as normal and deducting all the income taxes as normal, though the employer PRSI element will be 0.5% instead of the standard 11.05%. Unlike TWSS, the subsidy is not linked to the employer element of the salary payment, so long as monthly pay does not exceed €6,330.

EWSS is what it says on the tin – an employment subsidy, not a wage or salary subsidy. Unlike the TWSS, the new scheme allows for new hires to avail of the subsidy. As the subsidy is the same amount as the dole payment, the idea is to encourage bombed-out employers to retain staff rather than lay them off. An individual on the minimum wage will have half their payroll cost subsidised by the state until April 2021. And if that individual quits, a new person can be hired on the same terms.

Left out in the cold by the new subsidy scheme are employers whose income is down due to the pandemic but not down 30%. This will be problematic for thousands of micro firms and SMEs, as very few of them operated on a 29% of turnover breakeven margin a year ago. Such firms have the succour of the rates waiver, and the Restart Grant which rebates last year’s rates payment. That cash will dwindle away as the never-ending lockdown crushes consumer spending in the social economy.

In fairness to government, the business welfare can’t last forever. EWSS represents a sizeable scaling back in pandemic-related employment supports, but for the enterprises most impacted by lockdown, such as pubs and live events, the EWSS will continue to be a lifeline over the winter. More than cash, what every business needs urgently is less Covid-19 panic from ministers and officials and increased appetite for risk.