Taxing our way out of recession: the business view

A Zoom chat with key leaders conjured up a host of suggestions from a big reduction in the hospitality sector’s Vat rate to fast-tracking the payment of R&D tax credits by Revenue

Domini Kemp: the chef, food writer and entrepreneur: tax refunds need to happen fast Picture: Fergal Phillips

I’ve been writing in this column about tax measures required to escape the current Jurassic economy. To expand further on these ideas, I brought a group of business leaders together to share our views; call it our own Commission on Taxation.

I’m privileged so many of them accepted my invitation to a Zoom chat about tax. What screamed out from the call was the issue of getting cash into business fast – no complexity, no red tape, just cash.

This can comprise subsidies, encouraging investment or creating economic stimuli to get punters through the door now, and when scarred businesses come out the other side of Covid-19.

We’ve seen the recent government announcements regarding debt funding – and more may be needed – but this column is always about tax. As others have said, we were asked to shut down our economy, so let’s ask not what business can do for tax, but what tax can do for business.

In the Zoom call, Professor Niamh Brennan of UCD, one of the country’s leading experts on corporate governance, said that business shouldn’t be focusing on tax, but rather on survival. You can see her point. Any tax initiatives should be simple, so business leaders are not distracted from their prime task at the minute, which is to survive.

Brennan recognised the importance of incentives to maintain employment in this country. In particular, she said, the temporary wage subsidy scheme (TWSS) should be extended beyond its current expiry date of June.

We acknowledge that such cheques can’t be written forever, but they should continue for as long as is possible given the alternative of increased unemployment due to business closures. Put simply, no business means no tax for the Exchequer.

I’ve previously suggested a tax credit for business uncertainty along the lines of our R&D regime. We should modify it to include relief for resolving a business (as opposed to a technical) uncertainty where the business reinvents its operating model.

Call it the abnormal business credit (ABC). It could provide a full tax credit on the new source of taxable income arising from adapting the old model for, say, the first three years. We’ve done something similar with the start-up exemption for companies, and ABC broadens its application.

For example, in the restaurant business, ABC could operate on the new online sales of packaged product. Business uncertainty brought about a new business model with related taxable income, without which the old model might not survive to pay PAYE and other taxes into the future.

We could include conditions to counter potential abuse, but I think it’s fair to say that people adapting their business to manage the current uncertainty are unlikely to be doing it for a tax credit.

The Nike swoosh

Jim Power, an economist who I recently shared a virtual stage with as part of Isme’s partnership with Griffith College Dublin on responding to Covid-19, used the Nike Swoosh to outline the road to recovery – a sharp slowdown followed by gradual recovery over the next 18 months or so.

He said governments are rightly adopting a “when all else fails, we don’t” approach to include running higher deficits. We’ve just brought in a tax liability warehousing scheme with the approach that we’ll write the law later. How often do you hear that?

He is adamant that the road to recovery can’t be one of fiscal austerity in terms of tax increases and public expenditure decreases. Instead, he sees the way to improved public finances as the reignition of economic activity so tax can flow, leading to a virtuous growth circle.

Power recognised that there may be a surge in retail therapy or so-called “revenge shopping” when the restrictions are lifted. This needs to be maintained post-surge, so the voucher suggestion made elsewhere in this piece comes into focus there.

He referenced the motor trade’s virus nosedive, and recommended a significant, time-limited reduction in VRT as a means of encouraging customers through showroom doors. This would bring economic and green benefits, with newer cars producing lower emissions, while helping preserve regional employment and exchequer revenues.

Reboot and Reimagine

Gerard Brady, chief economist with Ibec, is one of the authors of that organisation’s Reboot and Reimagine campaign document, which runs to almost 240 pages.

One of its immediate asks is the setting up of a Commission on Taxation, something I’ve previously called for in these pages. My version suggested that legislation drafters be centrally involved from the start, with draft legislation written simultaneously with the Commission’s proposals.

The Ibec report also suggests providing stimulus measures for consumers and affected business sectors, such as the reintroduction and expansion of the 9 per cent hospitality Vat rate.

Lorraine Higgins, chief executive of Digital Business Ireland: PPE needs to be readily accessible. Picture: Fergal Phillips Photo by Fergal Phillips

Our Zoom group had diverse ideas on that sector’s Vat, all of which are covered here, but all agreed that a substantial Vat rate reduction is necessary now.

Brady recommended a one-time increase of the small benefit-in-kind exemption to allow employers give tax-free vouchers in 2020 and 2021. This focuses on domestic consumption, with the Exchequer return through Vat.

This shouldn’t have a substitution effect, in that the voucher should not be used to purchase commodities which would have been bought anyway. Their purpose is to increase spending activity.

Another participant in the call, Anton Savage, a broadcaster and communications consultant, suggested that such vouchers could focus on businesses worst hit by the virus.

Brady explained that Revenue’s tax “warehousing” scheme can help companies carry on trading during the Covid-19 disruption. He argued for the continuation of the scheme for firms affected by containment measures or significantly capacity- constrained by social distancing.

Next year, he said, the government should be putting in place a structured process to allow the worst-impacted firms to write off tax debts where they are a threat to business viability.

In his view, Revenue should also continue with accelerated payments to businesses of Vat bad debt relief, the R&D tax credit and other payments impacting liquidity.

On R&D, this would include fast-tracking the payment of R&D tax credits due for payment by Revenue to companies in the years to 2023. Overall, companies would simply draw down R&D tax credit payments sooner.

Reduce Vat

Businessman Gavin Duffy described the timing of this virus as difficult, given that we’re just getting over the last financial crisis.

In his view, significantly reducing Vat for the widest possible view of the hospitality sector is a key incentive, especially given the chief medical officer’s view that we shouldn’t expect to see people jetting away on holiday in the same numbers as previous years.

One commentator recently suggested that by the end of this year Irish households will have between €10 billion and €15 billion in total extra in bank accounts because they couldn’t spend it. People will most likely holiday in Ireland this year, which is good news in terms of keeping cash circulating around our economy.

Duffy also referenced the construction industry, and the need to help householders with sustainable energy use coming into the autumn and winter. In particular, he referred to the need to retrofit houses, something which would benefit our green agenda.

We’ve previously brought about tax depreciation for energy-efficient equipment, so doing something similar for that sector would be a natural step forward. He argued that such incentives should apply to the broader SME sector engaged in construction activity generally.

Sector-specific supports

Catherine Fulvio, the Wicklow-based chef, author and broadcaster, expressed her concerns about rural Ireland during the call, and in particular the impact of the lack of international tourists.

It could be St Patrick’s Day 2021 before we can expect another influx of visitors. Decisions on coming into Ireland will be based first on safety and secondly on cost, so the more affordable we can appear the better, meaning Vat rates as close to zero in the hospitality sector are essential.

Hospitality would be a target of the employee vouchers Brady mentioned earlier. Fulvio noted that so many in hospitality are looking at how they evolve after Covid-19, and that the ABC mentioned earlier is vital.

Domini Kemp, the restaurateur, wrote a piece a couple of weeks ago in this newspaper regarding the effect on her industry. In the Zoom call, she said that suggestions such as offering an extra bank holiday were pointless, and said the industry required sector-specific supports.

She said that tax refunds need to happen fast to improve working capital without complexity, citing the Covid-19 temporary wage subsidy scheme as a good example of how it could be done.

Kemp and Fulvio agreed that a significant reduction in the Vat rate for hospitality was urgently needed. Kemp, like Brennan, argued for the continuation of the wage subsidy scheme beyond its sell-by date.

“You need certain staffing levels irrespective of customer numbers,” she said.

Measures to improve working capital could involve additional tax refunds. One example would be where a business has a trading loss on permanently shutting up shop and that loss could be “thrown back” to generate refunds of the previous three years payments of tax on its profits.

Continuing businesses would benefit from three years’ refunds now which should be claimable during the tax year and not at tax return time.

Online sales

Lorraine Higgins, chief executive of Digital Business Ireland, referred to the fact that businesses are moving to online sales that may never have entertained the idea in the past. This is especially relevant for shops and other outlets that may not be able to facilitate social distancing.

They could be candidates for the ABC, she said, noting that such business models will have to change in a number of ways. Warehouses may have to be acquired and tax relief should be available on these structures where held by traders, she said.

Businesses will have to incur significant expenditure to make their premises safer for when employees return to base. Depending on the nature of this expenditure, some of it could be plant, which is written off over eight years. That’s too long, Higgins said, calling for it all to be allowed now in one go.

A number of clothing companies and distilleries have moved to manufacturing PPE and hand sanitisers. Higgins said that readily accessible supply chain of these products will be crucial in the short to medium term, and therefore ABC could apply.

Dr Rosalind Beere, chief executive of Chi Fit, created her own blend of tea in her kitchen and brought it to market two years ago. She echoed the call for a new Commission on Taxation as one of the first acts of the next government.

Her business involves three channels – online, retail and food services – and she too called for a Vat rate as close as possible to zero now, rising to a permanent commitment to a 9 per cent Vat rate in the hospitality sector in later years.

She suggested that additional support be given for marketing online to provide opportunities for increasing income. This could include additional relief for education costs.

Savage works with businesses of all sizes in his day job at the Communications Clinic, and is passionate about entrepreneurial activity.

“Entrepreneurs put their money on the line and they’re suffering right now. Getting that money back has a tax cost,” he said.

Where a closely-held company – less than five investors – makes a loan to one of its investors the company has to deduct withholding tax. Savage suggested that such withholding tax be suspended for the next year.

I can hear tax nerds spluttering into their muesli, saying that withholding tax protects against investors taking loans instead of salary. Savage concurred, but said that appropriate checks and balances could be legislated for.

These could include such relief only applying where financial hardship would otherwise prevail upon the investor, and if the loan isn’t paid back within a certain time then the withholding tax liability would have to be paid anyway.

We already have a number of such anti-hardship measures in the tax code. This could be combined with the requirement that the loan is not to the detriment of the business.

Tom Maguire is a tax partner with Deloitte