Tax measures explained

The July Jobs Stimulus package succeeds in delivering much certainty and hope to many Irish businesses that, while still deeply impacted by COVID-19 restrictions and their fallout, are beginning to open up and trade again.

The package totalling €7.4 billion is the largest single economic stimulus in the history of the State, and outlines a wide range of spending, funding and tax measures.

The focus of these tax measures appears to be twofold: support consumer spending through some targeted tax reliefs, and relieve the tax burden on struggling businesses, particularly those that were profitable prior to the COVID pandemic.

The July Jobs Stimulus was pointed in noting that the lockdown has seen a massive increase in savings (€3bn in May and a further €1.5bn in June). A number of tax and other measures have been introduced seeking to change that trend, enticing consumers to begin spending once again and driving demand in the economy.

The most significant change here is the reduction in the standard rate of VAT to 21% from 23% for a 6-month period from the beginning of September, which, if passed on to consumers, will impact the final cost to consumers on a wide range of goods and services, for example motor vehicles, adult clothing, non-basic food stuffs and alcohol (in fact the standard rate of VAT applies to broadly 50% of activity in Ireland).

Other tax measures seek to stoke demand by delivering a tax refund to consumers on certain purchases:

• The Stay and Spend incentive will deliver a tax refund of up to 20% for taxpayers that spend a minimum of €25 on accommodation, food, and non-alcoholic drinks between October 2020 and April 2021, up to a maximum refund of €125 per taxpayer, or €250 per jointly assessed couples. The tax credit may be set against the claimant’s USC liability where they do not have a sufficient income tax liability to fully absorb the tax credit in the year of assessment. We understand this incentive will be administered through an App. While the tourism and hospitality sector may be disappointed that the VAT rate reduction was not directly targeted to them, a net saving of up to 20% for consumers may ultimately prove a stronger incentive for many Irish consumers and will hopefully drive demand for further domestic tourism in the winter and spring months.
• The enhanced levels of support in the Help to Buy incentive will see the maximum possible refund increase by €10,000 to €30,000 or 10% of the cost of the new home (up from 5%). This increase will be available to qualifying first time-buyers who buy or build a new property until 31 December 2020, with the level of relief reverting to pre-23 July 2020 levels from 1 January 2021. This enhanced support is welcome and should stimulate supply of new housing, though the timeframe is limited. We would therefore see an opportunity for the government to both support first-time buyers and the Irish construction industry by extending the provisions into the new year.
• The allowable expenditure under the Cycle to Work scheme has been increased by €500 to €1,500 in the case of “e-bikes” and by €250 to €1,250 in respect of other bicycles.

The expansion and extension of the time-period of the Wage Subsidy Scheme is also to be welcomed in the context of delivering security to employers affected by the COVID restrictions and supporting employee confidence. It will cost the State €2.3 billion over the period to April 2021 and will continue to be a key pillar in the government’s COVID support measures, helping impacted firms to trade through the downturn and maintain the connection with their employees while also protecting the incomes of individuals.

The most significant measures announced to ease the tax burden on businesses, particularly for those previously profitable businesses, will be the early carry back of 2020 losses against 2019 profits. The introduction of these new loss relief measures, both for the self-employed and companies, may lead to an immediate refund of some or all of the corporation tax or income tax paid in previous periods.

Prior to this measure being introduced, companies would have to have waited until their 2020 corporation tax return was filed (potentially as late as September 2021) in order to claim back corporation tax relief for losses incurred in 2020. Under the measure, up to 50% of the company’s 2020 losses will be available for early carry back to shelter prior year profits, with the remainder of the 2020 losses being carried back in the usual way (i.e. with the 2020 corporation tax return). For example, a company with a 2020 trading loss of €100,000 can claim an early refund of their 2019 tax paid of up to €6,250 (being 12.5% of half of the 2020 loss of €100,000), with the remainder of the 2020 loss available to be carried back to 2019 in the usual manner with the company’s 2020 tax return.

For the self-employed, the measure goes beyond an acceleration of the refund process, but rather marks the introduction of the option to carry back of losses to prior years for continuing trades of self-employed individuals. Under the measure, self-employed individuals will be able to carry back up to €25,000 of their 2020 losses (and certain capital allowances) to shelter their 2019 profits. Clearly this is to be welcomed in the context of the current crisis, and raises the question as to why such a provision, which exists already for companies, should not be a permanent feature of the Irish tax regime for the self-employed.

In addition to facilitating relief for prior period tax liabilities, the July Stimulus extended various measures targeted at businesses that are struggling to meet their 2020 tax liabilities. These include passing of legislation to confirm the previously announced warehousing of VAT and PAYE liabilities, which allows businesses to delay payment of their PAYE and VAT liabilities without incurring interest and penalties. In addition, commercial rates have been waived until the end of September 2020 and the rate of interest on the late payment of tax liabilities has been reduced to 3%. For the latter, taxpayers must have reached an agreement regarding the late payment before 30 September 2020, the message here being that taxpayers must engage with Revenue in order to avail of the reduced rate.

The above tax refund and warehousing measures will allow businesses to focus their limited cash reserves where needed. However, stockpiling of tax debts for future payment will be a growing concern for businesses as the warehousing provisions are extended further. Revenue have to date been sensitive to taxpayers who have approached them with tax payment difficulties, and it will be important that this level of support continues when warehousing measures are tightened. Businesses mustn’t survive the COVID crisis only to be crippled by warehoused tax liabilities once the measures are removed.

As a key support to the above measures, we welcome the proposed extension of the Restart Grant to a broader base of SMEs. This, combined with the increase of the value of the grant from €10,000 to €25,000, will help smaller businesses impacted by the COVID lockdown to reopen and begin to trade their way out of the financial distress in which they now find themselves. Equally important will be the range of other credit support measures that have been introduced or enhanced as part of the package.