Debt Warehousing Payment Plan
We will look at a debt warehousing payment plan. As a quick recap, Debt warehousing came into play to enable a business to warehouse its tax debts. Revenue love their acronyms and would call this the DWPP. Sounds like a political party!
For most businesses period 2 ends on the 31st of December 2022. Repayment of the taxes was due to start on 1 January 2023. Revenue pushed back the repayment date to the 1st of May 2024. But the interest rate of 3% will apply from 1 January 2023
We will look at
- Taxes involved and periods
- Period 3
- Choices before the repayment period
- Taxes to prioritise
- Other considerations
The taxes involved are
- VAT [liabilities from 1 Jan 2020]
- Employer’s taxes PAYE [liabilities from 1 Feb 2020]
- TWSS overpayments [from the end of March 2020]
- EWSS overpayments [from 1 Sept 2020]
- Certain Income Tax liabilities
Period 1 ended on the 31st of December 2021. So, a business could warehouse Vat liabilities from 1 Jan 2020 to 31 December 2021. And for payroll taxes from 1 Feb 2021 to 31 December 2021.
Period 2 started on 1 January 2022 and ends on the 31st of December 2022. While a business couldn’t warehouse tax debts in period 2, it was a period when a 0% interest rate applied. Plus, the business didn’t have to make repayments during period 2.
Period 3 begins on the 1st of January 2023 and interest at 3% applies from this date. The business was due to enter a payment plan with Revenue to start paying down the tax debt from 1 January next. Revenue pushed back that date to the 1st of May 2024, considering the very high inflation costs.
This is very welcome as it gives many businesses breathing space. Money earmarked for Revenue will be available to offset higher running costs. While the repayment starting period is 17 months away the interest will start on the 1st of January 2023.
So, the question for many business owners will be what to do between 1 January next and the 1st of May 2024.
Let’s look at an example. Second Dates Ltd warehoused tax debts of €100,000 including Vat and PAYE from the start of period 1. They have €60,000 set aside to pay the tax debt and are mulling over their options. They saved €5000 per month in 2022 to accumulate the €60,000.
- Pay the €60,000 in full by the end of December. This will save them interest. Instead of paying interest at 3% on €100,000 they will pay 3% on €40,000.
- Pay €30,000 by the end of December and pay €2500 per month from 1 January 2023 to 30th April 2024 [€40,000]. This would leave a balance owing of €30,000 at the start of the repayment period on the 1st of May 2024
- Pay nothing now and leave the debt run until the 1st of May 2024. But continue to set aside savings every month into a separate account. Rather than save €5000 per month they reduce this down to €3000 per month [€48,000]
Mario and Luigi own the business 50:50. They are confident that they have a strong business and the outlook for 2023 looks promising. While their costs are increasing, they won’t suffer from very high energy costs like some. Despite their optimistic outlook they would still like to hold onto some cash so go for option 2
Saving €5000 per month was a stretch in 2022 but paying €2500 a month would be very doable. The benefits for them of this option are
- They hold onto €30,000 cash now which they can use in case of an emergency, or an opportunity arises
- They pay down €30,000 which reduces their interest cost and pay €2500 per month for 16 months so they will have €70000 paid.
- If they don’t use the €30,000 they held onto, they will have that to clear the balance in 2024
- They will still have a choice in May 2024. Enter a payment plan and pay 25% upfront [€7500] and pay the balance of €22500 over the following 36 months.
Taxes to Prioritise
Mario and Luigi should prioritise paying the PAYE liabilities. The reason for this is that non-payment of PAYE impacts their own taxes. When filing their tax returns, they won’t get a deduction for the PAYE on their salaries. That is because the PAYE wasn’t paid.
With the €30000 they should pay down the earliest PAYE liabilities arising from 1 Feb 2020. If they don’t continue to qualify for debt warehousing Revenue would be on the prowl. They would look to apply the normal interest rate of 10% per annum from the date the debt was due. In that case, there would be more interest on the earlier tax debts.
Once they paid the PAYE liabilities the focus should then be on paying the earliest Vat liabilities. Again, this is due to the potential for higher interest charges.
To continue to be part of the debt warehousing scheme business must keep their current taxes up to date. Thousands of businesses no longer qualify for failing to do this. Having a strong bookkeeping function in the business will help keep the wolves from the door. Once you are in you are in, but if you get kicked out, it can be hard to get back in again!
Many businesses have done well during the pandemic and have funds set aside to pay in full. If they have then they shouldn’t incur any interest cost by paying before the 31st of December next. They are unlike to get 3% interest on the money if it sits in a deposit account.
The 3% interest isn’t a dealbreaker for many. But giving all the money set aside could be foolish, with no buffer. Having an emergency fund available can make sense for a lot of businesses with rising costs. Access to cash when a machine breaks down or an opportunity arises is a good position to be in.
Without access to cash the business will have to look for funding. The time and effort looking for finance is a cost. Plus, will you get it, and will your bank give you 3% interest? You may get it but you won’t get 3%.
The purpose of the blog isn’t to cover all the options as every business will have its own priorities and needs. It is to give you a few options and discussing yours with your accountant is highly recommended.
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