Insights

Management of Tax Debt

  • Written By: Michael McGivern
  • Published: Mon, 24 Aug 2020 10:30 GMT

1. Overview

In recent months Revenue outlined certain initiatives to assist businesses experiencing cashflow and trading difficulties arising from the impacts of COVID-19. Since March 2020, Revenue suspended debt collection and the charging of late payment interest for the following 2020 VAT periods - January/February, March/April and May/June, and for the following 2020 PAYE (Employer) periods - February, March, April, May and June. In May 2020 Revenue announced the warehousing of these tax debts.

In July 2020, as part of the Business and Community Stimulus package, a reduced rate of late payment interest of 3% was announced in respect of non-COVID-19 related tax debts, which is designed to provide liquidity support to businesses and sole traders which have historic unpaid tax debts. Taxpayers who enter into an agreement with Revenue no later than 30 September 2020 can avail of the reduced rate from the date of that agreement.

Where businesses have tax debts outstanding, it is still possible to qualify for Revenue tax clearance, so long as the tax debts in question are either:

  • Tax warehoused (when they relate to Covid-19), or
  • Are included in a Phased Payment Arrangement (“PPA”) with Revenue (when not relating to Covid- 19 or otherwise not qualifying for tax warehousing).

This point in relation to tax clearance is very important, as businesses will require tax clearance to participate in any of these recently announced measures:

  • Participation in the Employment Wage Subsidy Scheme
  • Participation in the Stay and Spend scheme as a service provider whose customers can avail of tax credits in relation to their expenditure on accommodation, food and non-alcoholic drink, and
  • Qualification for accelerated tax loss relief.

This briefing considers the application of both the debt warehousing, and the reduced interest regimes.

2. Debt Warehousing regime

Revenue has a history of working with viable businesses to put appropriate phased payment arrangements in place in respect of outstanding tax debts. However, Revenue recognises that a new regime is required to deal with the unprecedented level of tax debt arising to businesses due to the effects of Covid 19. Therefore, in July 2020, legislation was enacted to allow for Covid 19 related tax debt to be deferred or ‘warehoused’. The scheme will operate as follows:

  • Unpaid VAT and PAYE (Employers) Covid-19 related tax debts may be deferred for a period of 12 months after a business resumes trading (in accordance with the Government’s Reopening Roadmap), and
  • A lower interest rate of 3% per annum will apply on the repayment of such warehoused tax debts after that date.

Other important aspects of the regime are:

  • PAYE (Employer) liabilities include income tax, USC, employer’s PRSI and LPT collected by the employer on behalf of a customer which are due to be remitted by employers under the PAYE system.
  • The warehousing period is the time during which the business was and is unable to trade due to the COVID-19, plus includes two months after the business re-commences trading.
  • All Personal and Business Division Covid-19 related VAT and PAYE (Employer) tax debts may be warehoused.
  • Where businesses are dealt with by Revenue’s Large Corporates and Medium Enterprises Divisions, Covid 19 related tax debts from a restricted trading phase, plus two months, should also qualify, where the business applies for warehousing.
  • Revenue highlights the following three distinct periods to the warehousing regime:
    • Period One - Restricted trading phase plus two months. A 0% interest rate applies.
    • Period Two – This period commences from end of period one and under period two a 0% interest rate applies for a duration of one year. The legislation enables the Minister for Finance to extend this period, if required, but under the current legislation it may not be extended beyond December 2022.
    • Period Three – This period is of indefinite duration and commences at end of period two. An annual interest rate of 3% applies to warehoused tax debt from start of period three. Revenue advises that businesses should contact Revenue with their proposed repayment plan for warehoused debt before end of period two.
    • All tax returns must be filed i.e. availing of the warehouse scheme is conditional businesses quantifying the outstanding tax debt in the first place, and this is to be done by filing the relevant tax returns.
    • Individuals and businesses which have additional tax liabilities that have not been declared in a relevant tax return, may not avail of the warehousing scheme unless the outstanding issues are regularised immediately.
    • Current taxes must be kept up to date for the duration of the warehouse period and for any subsequent arrangement period, to guarantee the 0% interest rate (while in warehouse) and the 3% (at the end of the warehouse period).
    • Refunds and repayments of tax arising in warehoused periods will be made, notwithstanding that the existence of outstanding tax debts under the scheme. However, a business may choose to offset any such repayment against the warehoused debts, or against any other outstanding tax debts if preferred.
    • Non-COVID-19 related tax debts may not be warehoused but may be managed as part of what Revenue refers to as “an overall case solution”. In respect of such tax debt, businesses may opt to enter into Phased Payment Arrangements, and in doing so, avail of a reduced rate of projected interest on such debts subject to certain terms and conditions. This is discussed below under Section Three below.
    • Revenue advises that for businesses dealt with in Revenue’s Business and Personal Division, correspondence will issue in September 2020 to inform them of their inclusion in the warehousing scheme.

3. Reduced interest rate regime

The July 2020 Jobs Stimulus Package and follow up legislation contains measures applying a reduced interest rate of 3% per annum to tax debts which do not qualify for the Covid-19 related warehousing regime outlined above. The rate of 3% rate is significantly below the standard interest rates of 8% and 10% which would generally otherwise apply.

The reduced rate applies to all tax types and to all agreements that are already in place and to new agreements which are made on or before 30 September 2020. It is available to taxpayers with undeclared liabilities for tax periods predating the COVID-19 phase, provided such liabilities are declared by 30 September 2020 under Revenue’s self-correction or voluntary disclosure mechanisms as set out in Chapter 3 of Revenue’s Code of Practice Revenue Audit and Other Compliance Interventions.

To avail of this regime, taxpayers must agree a phased payment arrangement (“PPA”) with Revenue before 30 September 2020, and the reduced rate is applicable from the later of 1 August 2020 or from the date of the PPA.

The operation of the regime may be summarised as follows:

  • The scheme is applicable to a PPA for any tax debt which does not qualify for inclusion in the above debt warehousing scheme.
  • It is available in respect of all type of tax and to all taxpayers whose affairs are dealt with in any Revenue Division.
  • The relevant PPA must be agreed before 30 September 2020.
  • The 3% rate is to be applied to projected interest for the lifetime of the PPA.
  • Full accrued interest will be applied to 1 August 2020 for existing arrangements or up to the date of PPA agreement for new arrangements.
  • Tax debts currently at the enforcement stage of collection by Revenue may qualify for the regime, but this depends on the current status of the enforcement process.
  • Revenue has made amendments to simplify the current online application process to cater for the following:
    • Application without requirement to supply a full suite of supporting documentation
    • Increased repayment term of up to 60 months, and
    • An ability to defer payments for up to 12 months
  • Where a taxpayer already has a PPA in place, Revenue will review this automatically and a taxpayer may avail of the reduced 3% rate on the balance of tax that remains outstanding from 1 August 2020. Revenue will contact relevant taxpayers in such situations.

4. Conclusion

The debt warehousing and reduced interest regimes are most welcome, and are valuable tools for businesses seeking to successfully overcome the myriad of Covid-19 related commercial challenges in these unprecedented times.

We would stress the importance of all businesses reviewing their tax affairs to ensure that they can qualify for tax clearance. As outlined above, having tax clearance is an important condition for qualification for a range of other Covid 19 related tax incentives, including access to the Employment Wage Subsidy Scheme, the Stay and Spend scheme, and the accelerated tax loss scheme. In relation to outstanding tax debt. To obtain the reduced 3% rate for such PPAs, they must be in place by 30 September 2020. Businesses must act quickly.


Details sourced from and correct as at 24th August 2020: https://www.revenue.ie/en/corporate/communications/covid19/index.aspx

 

DISCLAIMER
We have taken great care to ensure the accuracy of this publication. However, the publication is written in general terms and you are strongly recommended to seek specific advice before taking any action on the information it contains.
Smith & Williamson Freaney Limited Authorised to carry on investment business by the Institute of Chartered Accountants in Ireland. A member of Nexia International.

Government and tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice from their financial adviser before making financial decisions.

 

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