A business leaders’ view on taxing our way out of the Jurassic Economy

I’ve been writing in this column about tax measures required to escape the current Jurassic economy. Rather than Tom Solo, I brought a group of business leaders together to share our views; call it our own Commission on Taxation. I’m privileged so many answered my call to “Zoom” on Tax. My compadres in this initiative are Gerard Brady, Chief economist IBEC; Dr. Rosalind Beere, CEO of Chi Fit; Professor Niamh Brennan, UCD; Gavin Duffy, Founder Gavin Duffy & Associates and former Dragon; Catherine Fulvio, Ballyknocken House & Cookery School; Lorraine Higgins, CEO of Digital Business Ireland; Domini Kemp, CEO of itsa ltd (cafes, restaurants & catering); Jim Power, Economist and Anton Savage, Broadcaster, Director of The Communications Clinic.

What screamed from this call was getting cash into business fast. No complexity, no red tape, just cash for the business. This can comprise subsidies, encouraging investment or creating economic stimuli to get punters through the door now and when scarred businesses come out the other side of COVID-19. We’ve seen the recent government announcements regarding debt funding, more may be needed, but this column is always about tax. As others have said, we were asked to shut down our economy, so let’s ask not what business can do for tax, but what tax can do for business.

Professor Niamh Brennan and one of the country’s leading experts on Corporate Governance explains that business shouldn’t be focussing on tax but rather on survival. You can see her point so any appropriate tax initiatives should be simple so business leaders are not distracted from their prime surviving directive.

She recognises the importance of incentives to maintain employment in this country. In particular, the Temporary Wage Subsidy Scheme (TWSS) should be extended beyond its current sell by date of June this year. We acknowledge that such cheques can’t be written forever but they should continue for as long as is possible given the alternative of increased unemployment due to business closures. Put simply no business means no tax for the Exchequer.

I’ve previously suggested a tax credit for business uncertainty along the lines of our R&D regime. We should modify it to include relief for resolving a business (as opposed to technical) uncertainty where the business reinvents its operating model: Call it the “Abnormal Business Credit” (ABC). It could provide a full tax credit on the new source of taxable income arising from adapting the old model for, say, the first three years. We’ve done something similar with the start-up exemption for companies and ABC broadens its application.

For example in the restaurant business, ABC could operate on metamorphoses to online sales of packaged product. Business uncertainty brought about a new business model with related taxable income without which the old model mightn’t survive to pay PAYE and other taxes into the future. We could include conditions to counter potential abuse but I think it’s fair to say that people adapting their business to manage the current uncertainty are unlikely to be doing it for a tax credit.

Jim Power is one of Ireland’s leading economists. We recently shared a virtual stage as part of ISME’s partnership with Griffith College Dublin on responding to COVID-19. Jim uses the Nike Swoosh to outline the road to recovery i.e. a sharp slowdown followed by gradual recovery over the next eighteen months or so. He says governments are rightly adopting a “when all else fails, we don’t” approach to include running higher deficits. We’ve just brought in a tax liability warehousing scheme with the approach that we’ll write the law later. How often do you hear that? He is adamant that the road to recovery can’t be one of fiscal austerity in terms of tax increases and public expenditure decreases. Instead, he sees the way to improved public finances is reigniting economic activity so tax can flow leading to a virtuous growth circle.

Jim recognises that there may be a surge in retail therapy when the restrictions are lifted i.e. “revenge shopping”. This needs to be maintained “post-surge” and so Gerard Brady’s vouchers suggestion below comes into focus here. Jim references the motor trade’s virus nosedive and recommends a significant time limited reduction in VRT as a means of encouraging customers through showroom doors. This brings economic and green benefits with newer cars producing lower emissions while helping preserve regional employment and Exchequer revenues.

Gerard Brady, Chief economist with IBEC, is one of the authors of its “Reboot and Reimagine” campaign document, which weighs in at almost 240 pages.

The campaign report outlines policy actions for a “Reboot & Reimagine” of Ireland’s business sector. One of its immediate asks is the setting up of a Commission on Taxation. I’ve previously requested that in these pages. My version suggested legislation drafters be centrally involved so that draft legislation is written simultaneously with the Commission’s proposals ready to green light. IBEC’s report also suggests providing stimulus measures for consumers and impacted business sectors such as the reintroduction and expansion of the 9% hospitality VAT rate. Our group had diverse approaches for this sector’s VAT so I’ve included all views here but all are clear: A substantial VAT rate reduction is necessary now.

Gerard recommends a one-time increase of the small benefit in kind exemption to allow employers give tax-free vouchers in 2020 and 2021. This focusses on domestic consumption with the Exchequer return through VAT. This shouldn’t have a substitution effect in that the voucher should not be used to purchase commodities which would have been bought anyway. Their purpose is to increase spending activity. Anton Savage suggested that such vouchers could focus on businesses worst hit by the virus.

Gerard explains that Revenue’s tax ‘warehousing’ scheme can help impacted companies carry on trading during the COVID-19 disruption. He argues for the continuation of the scheme for firms impacted by containment measures or significantly capacity constrained by social distancing. He adds that next year the Government should be putting in place a structured process to allow the worst impacted firms to write-off tax debts where they are a threat to business viability.

In his view, Revenue should also continue with accelerated payments to businesses of VAT bad debt relief, the R&D tax credit and other payments impacting liquidity. On R&D, this would include fast-tracking payment of R&D tax credits due for payment by Revenue to companies in the years to 2023. Overall, companies would simply draw down R&D tax credit payments sooner.

Gavin Duffy sees the timing of this virus as difficult given we’re just getting over the last financial crisis. In his view, significantly reducing VAT for the widest possible view of the hospitality sector is a key incentive especially given the Chief Medical Officer’s view that we shouldn’t expect to see people jetting away on holiday in the same numbers as previous years.

One commentator recently suggested that by the end of this year households will have between €10 and €15 billion extra in their bank accounts because they couldn’t spend it. He noted that the last time Irish consumers had income but couldn’t spend it was during World War II. So people will most likely holiday in Ireland this year which is good in keeping cash swoshing around our economy.

Gavin also references the construction industry and anything that helps the sustainable energy use of any house coming into the autumn and winter. In particular, he references the need to retrofit houses benefitting our green agenda. According to Gavin both can be stimulated by the next Government. We’ve previously brought about tax depreciation for energy efficient equipment so this would be a natural step forward. He argues that such incentives should apply to the broader SME sector engaged in construction activity generally.

Daytime Emmy nominated Catherine Fulvio is concerned about rural Ireland. Equally, economist Jim Power explains that motor showrooms are a key part of some small towns around Ireland and you’ll recall his suggestions from earlier. Catherine references the impact of international tourism on rural Ireland noting it could be St Patrick’s Day 2021 before we could expect another influx. Decisions on coming into Ireland will be based firstly on safety followed by cost. Therefore the more affordable we can appear the better so VAT rates as close to zero in the hospitality sector are essential. Hospitality would be a target of the employee vouchers Gerard Brady mentioned earlier and cost would factor there. Catherine notes that so many in hospitality are looking at how they evolve after Covid such that the ABC mentioned earlier is vital.

The renowned restauranteur Domini Kemp wrote a piece a couple of week’s ago in these pages regarding the effect on her industry. She noted that offering an extra bank holiday was pointless and the industry required sector specific supports. She notes that tax refunds need to happen fast to improve working capital without complexity so that cash can remain in the business arguing the TWSS would be a good model of how it should be done. She and Catherine Fulvio agree a significant reduction in the VAT rate for hospitality is urgently needed. Domini, like Niamh Brennan, argues for the continuation of the TWSS beyond its sell by date because as she says no matter what happens you need certain staffing levels irrespective of customer numbers.

Measures to improve working capital could comprise additional tax refunds e.g. where a business has a trading loss on permanently shutting up shop then that loss can be “thrown back” to generate refunds of the previous three years payments of tax on its profits. Where the business continues that throwback period is one year. Continuing businesses would benefit from three years refunds now which should be claimable during the tax year and not at tax return time.

Digital Business Ireland’s CEO, Lorraine Higgins refers to the fact that businesses are moving to online sales who may never have entertained the idea in the past. This is especially relevant for shops and other outlets that may not be able to facilitate social distancing. She recognises they could be candidates for the ABC mentioned earlier. She notes that such business models will have to change such that warehouses may have to be acquired and tax relief should be available on these structures where held by traders. She explains that businesses will have to incur significant expenditure to make them safer for when employees return to base. Depending on the nature of this expenditure, some of it could be plant which is written off over eight years. That’s too long, we need to allow that now in one go.

Lorraine also explains that clothing companies and distilleries have moved to manufacturing PPE and hand sanitisers. She recognises that a readily accessible supply chain of these products will be crucial in the short to medium term and therefore ABC could apply depending on their financial fact patterns.

Chi Fit’s CEO, Dr Rosalind Beere created her own blend of tea in her kitchen and brought it to the market two years ago. She echoes the call for a new Commission on Taxation as one of the first acts of the new Government.

Rosalind’s business involves three channels being online, retail and food services so she agrees with a VAT rate as close as possible to zero now and rising to a permanent commitment to 9% VAT rate in the hospitality sector in later years. She suggests additional support be given for marketing online to provide opportunities for increasing income. This could include additional relief for education costs to move businesses online. She cites the example of a physiotherapist who is conducting business online now because of the crisis. Let that sink in for a second.

Anton Savage looks at businesses of all sizes in his day job at the Communications Clinic but is passionate about entrepreneurial activity. Anton says entrepreneurs put their money on the line and they’re suffering right now. Getting that money back has a tax cost. Where a closely held company (e.g. less than five investors) makes a loan to one of its investors the company has to deduct withholding tax and Anton suggests that such withholding tax be suspended for the next year.

I can hear tax nerds spluttering into their muesli saying such withholding protects against investors taking loans instead of salary. Anton concurs but explains that appropriate checks and balances could be legislated for and Ireland is brilliant at that stuff. They could include such relief only applying where financial hardship would otherwise prevail upon the investor and if the loan isn’t paid back within a certain timeframe then the withholding tax liability would have to be paid anyway. We already have a number of such anti-hardship measures in the tax code (e.g. interim refunds of certain withholding taxes). This could be combined with the requirement that the loan is not to the detriment of the business because as one famous Vulcan put it; “the needs of the many outweigh the needs of the few or the one”.

Our focus is to get people to spend but to do that people must also be encouraged to sell. Michael McDowell SC kindly wrote a foreword to my book on Capital Gains Tax (CGT) and explained that when the Minister “in 2002 halved the 40% CGT rate and quintupled the yield on CGT, it became very clear that the rate of CGT hugely influenced its yield in a manner quite different from other forms of taxation”. This should be considered now given the emphasis on consumer activity post crisis.

I’m extremely grateful for my compadres giving their time in this initiative. There is so much that can be done and this column outlines but a few ideas. Right now, cash in business is the path to a post Jurassic world.

Please note this article first featured in the Business Post on 24 May 2020 as per PDF here and was re-published kindly with their permission on our website.