Budget 2022, tax debt warehousing and the current business challenges

What’s it like operating a tax practice in current circumstances?

The last 18 months have been challenging in terms of managing workflows, connecting people and ensuring client service is maintained. Currently, most staff are working remotely, and we have planned for a safe and structured return to the office with a hybrid working model.

We have learned many things from having to do so, and the use of Teams and Zoom has shown us how we can remain connected with clients and use technology to its maximum while still keeping a personal relationship. Most people look forward to returning to in-person meetings, as video conference calls are not the same as one-on-one meetings.

What tax issues have been top of mind with clients this year?

Brexit has been a real challenge for many businesses, irrespective of whether it is trade to, from or through the UK. The amount of paperwork has gone up, and some clients are looking at their business model going forward to minimise the cost of doing business with the regulations in place.

Some traders have switched their focus to the broader EU market; however, that is not possible for all. Likewise, for importers, the main supply chain for many years has been through the UK, and due to the limited size of the Irish economy, it is difficult to change that overnight.

The tax debt warehousing arrangement runs until the end of 2021. Among your clients using the scheme, what counsel are you providing about repaying this tax debt?

It is important to acknowledge the critical role played by the government and the Revenue Commissioners in providing business supports in a very timely manner. Without these supports, many businesses would have gone under.

However, as we have found out in the past, lenders want their loans repaid, which is likely to create problems in the short to medium term. With most businesses reopening, they will now be looking at how they move forward, and the government/Revenue will need to look at businesses that have warehoused tax debt but are otherwise viable and whether some of these warehoused debts will need to be written off.

The total warehoused tax liabilities are about €2.5 billion, and it is inevitable that not all of that will be collected. Businesses will also need to look at their ability to repay debt and ensure that they are not trading while insolvent.

It would be important that the government gives a clear signal in the upcoming Budget as to how it will deal with these cases and look at extended debt facilities or a balance of debt extension and partial write-down of these warehoused loans. The new Small Company Administrative Rescue Process (SCARP) could be an important piece of legislation in terms of dealing with non-viable levels of debt and onerous lease obligations.

Which tax incentives for business incentive should be top of the finance minister’s agenda, and what should he do?

Getting businesses back up and running and employees back into the workforce needs to be a key focus in the shorter term. This means that businesses will continue to need supports, and many will need to look at their business models and invest to reflect the current position.

The EIIS scheme is an important support; but for most people it is too complex, and there are too many pitfalls that one can land in. The scheme needs to be simplified and overhauled to ensure that the overarching principles are delivered upon, and companies should not have to spend significant time and money on access to the scheme.

In addition, the R&D scheme is vital for Irish businesses, and it needs to be seen by the state as a critical business support that helps Ireland compete internationally, rather than as simply another tax cost/subsidy. 

Greening of the economy is a government priority. What tax measures do you suggest to accelerate this process?

The government needs to give a message in the Budget that it will use tax measures to support the green and ESG agenda. Energy efficiency supports through grants, and support for greater use of public transport and electric/hybrid vehicles, would be an important signal of the desired and necessary direction of travel by Ireland in this area.

In its pre-Budget submission, the Family Business Network contends that high tax is preventing or delaying the efficient transfer of family firms. If you concur, what tax changes would you recommend?

CAT Business property relief should be extended from 90% to 100%, while the €3m cap on CGT retirement relief for inter-family transfers of assets for those over 66 should be removed as it is now proving to be a major obstacle to getting the next generation involved.

The tax legislation on share buybacks could be simplified to ensure that owners who want to retire are not left with little personal resources when they exit the business, and some anti-avoidance legislation that was brought in to deal with perceived abuses needs to be looked at again where it is affecting genuine commercial transactions.

In some instances, businesses that could have been transferred to family members are being sold into the market as the tax treatment of inter-family sales can be more onerous than a sale to a third party.

The Irish CAT and CGT rates are 33%, and if one cannot avail of reliefs, it is an expensive exercise to transfer businesses or assets to the next generation, in particular if there is no excess cash in the business to fund the taxes.

This article first appeared in Business Plus