All Change in the Government Finances?
We could be on the threshold of a fundamental shift in how governments fund public spending, writes Kevin McLoughlin, EY Head of Tax
The scale of the Covid-19 economic, societal and health crisis makes it probable that borrowing will become a much greater feature of government funding in future years. The acceptance at EU level of a degree of mutualised debt and grant aid to member states in economic difficulties, indicates that this may well be the case.
This in turn may lead to countries raising 50 or 100-year debt at very low rates and employing the funds for Marshall Plan type strategies. We could well be at a point where governments are not so much focused on paying down debt but borrowing for longer at low rates instead. Of course, inflation will need to be kept down to sustain that.
Tax will have to form some part of the equation. Debt, no matter how long dated, has to be serviced and repaid at some point. However, the most significant tax measures in the July Jobs Stimulus were the reduction in the main VAT rate from 23% to 21%; the Stay and Spend incentive which offers a tax refund of up to 20% for taxpayers that spend at least €625 in the hospitality sector; and the early carry-back of 2020 losses against 2019 profits for businesses and self-employed individuals.
While these are all welcome, the continuing role of taxation as a lever of recovery has to be seen as doubtful. Indeed, even the VAT reduction only has a six-month time horizon, and in this regard, we are advising clients to urgently review their own positions so that they can optimise this short-life benefit.
The government has a delicate balancing act to play in this regard. It will have to balance the books sooner or later, but attempting to do that with tax increases or simply a restoration of previous levels, may threaten to derail a nascent recovery. On the other hand, the government will hope that employment growth — generated by the recovery — will go a long way to filling the hole in its coffers.
The government has attempted to use taxation in order to give businesses some breathing space, ahead of that hoped-for recovery. Deferrals of property taxes and the warehousing of outstanding tax bills have come as welcome reliefs for businesses, since the pandemic took hold.
Like government debt, these bills will fall due at some stage. Over 70,000 employers have availed of the debt warehousing facility, an even greater number than those registered for the Temporary Wage Subsidy Scheme.
It is vital that companies file their payroll and VAT returns on time to allow them to participate in the scheme. Our advice to clients has been to closely monitor the amounts of debt accruing and where possible, to set aside and ring-fence surplus income to pay off these debts. If there is a requirement to dip into this fund, there should be a plan in place for how it will be replenished and a timeline for doing so.
The next step on the road to recovery will be the announcement of the National Recovery Plan in September or early October, followed closely by Budget 2021, which will give effect to the funding aspects of the plan. The measures announced then will likely dwarf the spending measures announced in any recent budget. That will result in a very large deficit, which the government will be challenged to service.
With little or no scope to raise personal or corporation tax rates, and limited capacity or political desire to broaden the tax base, it would appear that the government has little option but to continue to borrow to meet its deficits for the foreseeable future.
Partner, Head of Tax BDO
Ciarán Medlar says the firm, like many of its clients, was suddenly faced with a number of new and different challenges due to the pandemic. “Our experience is that we and our clients were faced with a three-stage process, to manage business priorities and leverage new thinking, this being React, Resilience, and Realise,” he adds.
WAREHOUSING TAX DEBT The ‘warehousing’ arrangements consists of three phases. Phase 1 is the restricted trading phase. Tax debts built up while the business was unable to trade or was subject to restricted trading, and debts for an additional two months after the business recommences ‘normal’ trading, will be ring-fenced.
In Phase 2, following recommencement of ‘normal’ trading, outstanding VAT and employer PRSI tax debts will be warehoused for 12 months. During this time no interest will be charged. Phase 3, the reduced-interest phase, at the end of the 12-month period, sees a reduced interest rate of 3% applied.
The tax debt will have to be quantified by the business through the filing of all relevant returns for the restricted trading phase. As some pattern to business re-emerges, the repayment of deferred and warehoused debt will need to be constantly reviewed.
WAGE SUBSIDIES The realtime implementation of a very complex TWSS by Revenue is to be applauded for how it dealt with the immediacy of the challenge facing employers. It is hoped that Revenue will adopt a pragmatic multi-year approach when collecting any deferred tax liabilities for employees included in the TWSS.
CORPORATION TAX-LOSS RELIEF In order to avail of this, a business must have fully met its filing obligations in the preceding accounting period, be generally tax compliant and make a declaration that it has incurred a loss, or interestingly, reasonably expects to do so, in the specified accounting period. The basis of the expected loss is likely to be subject to verification checks from Revenue.
STAY & SPEND TAX CREDIT This is a very positive initiative, previously proposed by my colleague Austin Hickey, BDO director. As we are all aware, the hospitality and tourism industries have been hit badly, so initiatives to assist with tourism are greatly welcomed.
BUDGET 2021 Budget 2021 should consider the introduction of an export credit insurance scheme, similar to schemes in the EU and the UK. This would assist the agri-food and drinks sectors. Another measure to consider would be a review of reducing the current 13.5% VAT level.