"The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin". Mark Twain
Last week we spoke about things you need to know when setting up a company. In case you missed it read here
We are now into the thick of Tax return filing season. Corporation Tax [CT] returns, for those with 31 December 2019 year ends, are due on the 23rd of this month. After that we have Income Tax [IT] returns deadlines. This will focus the mind of many business owners. Have I got enough cash to meet my CT and IT liabilities? We will look at the warehousing of tax debt and focus on the reduced 3% available until the end of this month.
What Tax debt do I have?
There are two different tax warehousing schemes that the government is offering. One scheme relates to tax debt arising during the Covid-19 period. The taxes covered in this part of the scheme are Vat and Employer's payroll taxes PAYE, PRSI & USC. The other scheme applies to all other non-Covid-19 tax-related debts. We will focus on this one as the closing date for this is fast approaching.
Normal interest rates on overdue taxes are 8% and 10% in Ireland. Revenue is offering a reduced rate of 3% for the warehousing of all non-Covid-19 tax debt up to the end of this month. To avail of this, there must be
- an existing tax liability and
- a phased payment arrangement [ppa] in place with Revenue by the end of this month
Revenue has confirmed in their paper that this covers all the main business tax heads such as
- Corporation Tax
- Income Tax
- Capital Gains Tax
- Relevant Contracts Tax
Per their guidelines, they have amended the application process on ROS to simplify it so that
- There is no need to supply a raft of supporting documentation when completing the PPA online
- Increased repayment terms of up to 60 months
- Ability to defer payments up to 12 months
What if I have an existing PPA in place?
If you have then there is some good news for you. Existing tax debt that is part of a PPA already in place can avail of the lower interest rate from the 1st August 2020. This will reduce their interest from either 8% or 10% depending on the type of tax liability covered. Revenue should be in contact with you to confirm the reduced interest rate.
Let's look at an example
Bill and Ted Ltd had a successful trading year to 31 December 2019. The company had a profit of €250,000 which resulted in a Corporation Tax liability of €31,250. Their accountant submitted the CT return earlier this week so that the liability is due. As trading has been more difficult this year, with less funds available, they enter into a PPA. Once they complete a PPA before the 30th of September they will be able to avail of the reduced interest rate.
What if they didn't have accounts done and were late submitting their CT return? If their CT return wasn't submitted until the middle of October, then they couldn't benefit. Their CT liability was only realised in October so they couldn't enter into a PPA by the 30th of September. In this case they would have to pay 8% interest, and entering into a PPA could be more difficult.
Undeclared Tax liabilities
Revenue confirmed that undeclared tax debts can also qualify for the reduced interest. These could be tax liabilities arising from an error or omission because of:
- failure to file a tax return or
- failure to declare income
- under declaration of income
- overclaim of expenses or credits
The correct tax return would have to be with Revenue, so the liabilities are there. Once that's done the PPA option and reduced interest rate becomes available.
Who could this work for?
Self-employed who would have a large Income Tax liability for 2019. They would also have to pay preliminary tax for 2020. It could work for the balance of the 2019 liability. Preliminary tax doesn't fall into the scheme as that is not a tax liability but a payment on account. Some self-employed would avail of bank finance to pay their Income Tax liabilities. This could be an alternative to that. The interest rate would be cheaper, and the term could be longer to give more flexibility
Corporates that did well in 2019 and who have a balance of CT owing for last year. Again, preliminary CT wouldn't fall in under the reduced interest rate.
It could work for a person who sold their business and is on an earn-out arrangement. This is where they will get paid for the sale based on set future financial targets. The full CGT falls due in year 1 but a large portion of proceeds remains outstanding. It would be possible to spread the CGT pay throughout the earn-out under the PPA, once that was for 5 years or less.
Individuals or businesses with Capital Gains Tax, Vat, PAYE, or RCT liabilities. They can get their tax affairs in order before the 30th. This could help you get tax clearance. This is necessary for the employee wage subsidy scheme among other benefits.
What action should I take?
If this is something for you then you need to engage with your advisor asap. This could involve filing your tax returns earlier than normal. You may file your Income Tax return every year on the 31st of October but that will need to go to Revenue next week. This is to ensure that the liability is on their system so that you can enter into the PPA arrangement
If you have undeclared Revenue debt, then those returns will need to go to Revenue. If you have changes to make on existing returns, then those changes must happen before the 30th.
For those in existing PPA arrangements Revenue are due to contact you. Check if your monthly tax payment has been reduced. Give Revenue until the end of the month to contact you. They are very busy too.
Look at your available cash. You could have enough funds to pay and, in that case, you should pay the tax debts owing. Remember this is still an interest rate of 3% and the tax debt won't go away. A good business should be able to meet its tax liabilities as they arise. It is always prudent to pay those liabilities when they fall due so you can plan ahead with the remaining cash.
This tax scheme has its merits in the reduced interest rate, getting your tax affairs in order, and tax clearance. One could argue that in an era of low-interest rates the 3% is what it should always be. Many businesses have suffered in the pandemic and cash is tighter. They have good resilient businesses, and this could be an option for them to give flexibility. To download the information booklet click here - see pages 15 onwards
Do you need help in this area? If so, call Deirdre and she will point you in the right direction. Or send us a mail click here