Income happens to be one of the largest business lenders in the country.
This is certainly an unusual situation. State tax authorities usually take money, not give it.
However, the emergence of tax debt warehouse schemes as part of the government’s Covid response in 2020 has made Revenue a major creditor, especially for small businesses.
The company is currently saddled with debt worth €2.8 billion, most of which has not been repaid.
Of the tens of thousands of companies participating in the scheme, only 343 have so far entered into repayment arrangements, saving just €11 million from their multi-billion € balances.
In all fairness, no one is obliged to pay yet. These 343 companies have volunteered to be exempt from back tax.
This leaves around 84,000 companies, each with an average balance of over €33,000. That’s not a trivial amount for a small business, but for now, paying it isn’t a pressing issue because you don’t even have to pay interest on that money.
But that is about to change. Starting next month, Revenue will offer her two options to everyone in the scheme. Pay the full amount before the end of the interest-free period at the end of the year or set up a staged payment arrangement to settle the debt.
But if interest rates on debt carried forward next year have been cut to just 3%, why would companies pay, especially now that funding costs are rising?
The European Central Bank (ECB) has raised interest rates by 1.25 percentage points since July and is likely to raise interest rates by another 0.75 percentage points in October.
Therefore, the cost of refinancing tax liabilities is increasing rapidly.
The calculation of the business owed is simple. Pay off the more expensive debt first and leave the cheaper earning debt on for as long as possible. Until the company had to pay his 10% penalty rate, why?
In addition, there is plenty of cash on Irish corporate balance sheets. This may not be evenly distributed, but overall there is still money.
That said, the next few months will require delicate negotiations between tax authorities, small businesses and their accountants.
With at least a 25% lump sum required to be paid up front to enter into a tiered payment arrangement, many businesses will face cash flow crises just to start paying down their revenue liabilities on time.
If cans can be kicked, companies can keep other problems at bay
Colm Brown, the new head of the Irish Tax Association, is urging the Revenue Service to take a ‘realistic approach’ to these negotiations.
He notes that SMEs are currently facing many challenges, from rising energy and wage costs to supply chain disruptions and labor shortages.
Following his remarks at the Institute’s annual meeting on Thursday, Brown said:
In short, there will be pressure on revenues to act generously on these tax liabilities so as not to jeopardize small businesses on the eve of a recession.
The Treasury went to this with an open eye, knowing that the revenue did not help all businesses.
In fact, Treasury officials estimate that the debt scheme will eventually need to write off about a quarter of the retained taxes before it ends in 2024.
The question before revenue is how quickly do you want to start these write-offs?
