Covid-19: Tax Liabilities and Cash-Flow Considerations - Baker Tilly
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2020 • Number 02 85
Brendan Murphy
Tax Director, Baker Tilly
Kevin Donovan
Tax Consultant/Senior, Baker Tilly
Covid-19: Tax Liabilities and
Cash-Flow Considerations
Introduction the full force of the national shutdown, with
many pub, restaurant and hotel owners fearing
The first case of Covid-19 in Ireland was
for the future of their businesses. Although
announced on Saturday, 29 February 2020.
this concern for the long-term future of their
In the weeks that followed, the Government
business is in every business owner’s mind,
introduced stay-at-home measures and the
short- to medium-term cash-flow management
closing of non-essential businesses to try to
has been to the forefront of every business’s
limit the outbreak of the pandemic in Ireland.
considerations since early March.
These unprecedented measures, albeit
necessary for the welfare of all our people,
The Government and the Revenue
have had a significant negative impact on
Commissioners acted quickly in response,
almost every business in Ireland. The hospitality
introducing a much-welcomed range of
and tourism industries, in particular, have felt
86 Covid-19: Tax Liabilities and Cash-Flow Considerations
measures to assist businesses experiencing The definition of SME above is quite limited, but
cash-flow difficulties. The most high-profile Revenue encouraged other businesses facing
measure has been the Covid-19 Temporary cash-flow issues to contact the Collector-
Wage Subsidy Scheme, which reimburses General’s Office or to engage directly with their
employers an amount of an employee’s net branch contacts in Revenue’s Large Corporates
weekly wage to a maximum of €410 in some Division or Medium Enterprises Division.
instances.1 Other useful measures introduced by
the Government include loans operated by the The Collector-General stated that:
Strategic Banking Corporation of Ireland with
interest rates of 4% and 4.5% as well as grants “Revenue is aware that when temporary
and vouchers to encourage companies to cash-flow issues arise for a business, it
obtain professional advice during the crisis and can be a worrying time in terms of the
to launch or improve their online business. ability to keep an otherwise good tax
compliance record on track. Rather than
However, this article highlights some of the most hope that such payment difficulties will
useful measures introduced by the Government fix themselves in time, I would strongly
and the Revenue Commissioners from a tax encourage affected businesses to take
compliance perspective; it also sets out some the following practical steps:
practical cash-flow suggestions that may be of
• c
ontinue to send in your tax returns on
benefit from a corporation tax perspective.
time, and
• e
ngage early with us if you run into, or
Revenue Measures for Tax are facing, difficulty in paying your tax.”
Compliance
Payroll and VAT These measures were then extended to include
On Friday, 13 March, Revenue issued a May/June VAT liabilities and May and June
statement outlining some measures to payroll tax liabilities.
assist small and medium enterprises (SMEs)
experiencing cash-flow difficulties during the The Minister for Finance subsequently
crisis. SMEs were defined as companies whose announced the introduction of “warehousing”
annual turnover did not exceed €3m and measures on 2 May to replace the existing
who were not dealt with by Revenue’s Large VAT and employer PAYE measures. Although
Corporates Division or Medium Enterprises Revenue is yet to make an announcement
Division. Under the initial measures, companies regarding the exact criteria that must be met
were told that they should continue to file all for debts to be warehoused, it is likely that
tax returns on time but that interest would they will follow the same criteria as the original
not be imposed for the late payment of VAT measures – that the warehousing will be
liabilities for the January/February 2020 VAT automatic for SMEs and available on request for
period or of employer PAYE/PRSI liabilities all other businesses.
for February or March. This measure was
subsequently extended to March/April VAT Announcing the warehousing measures,
returns and April payroll returns. Revenue also Revenue confirmed that:
confirmed that tax clearance certificates would
remain in place during the coming months, • “ COVID-19 related VAT and Payroll tax
giving comfort to businesses that they could debts, due from 1 March 2020 to the
fail to make a VAT or payroll payment without date when sectoral restrictions are
incurring interest charges on late payment or lifted, will be parked for a period of
losing their tax clearance status. 12 months
1 See also articles in this issue “Legislating in a Crisis: The Temporary Wage Subsidy Scheme” by Pat Mahon and Sean Walsh; and “Revenue
Commissioners’ Update”.2020 • Number 02 87
• n
o interest will accrue on the tax debts The issuing of tax refunds is often delayed by
during the 12 month period Revenue where iXBRL financial statements are
• t hereafter, the COVID-19 related tax required to be filed as part of the corporation
debts will carry a reduced interest rate tax process but have not been. However,
of 3% (down from 10%), until the debt Revenue has advised that it will not prevent a
is paid refund from issuing because iXBRL accounts
have not yet been filed. The iXBRL financial
• t he timeframe allowed to pay the statements should still be filed as soon as
‘warehoused’ debt will be flexible possible but will no longer be compulsory in
and determined by the ability of the order for a refund to issue during this time.
business to pay both COVID-19 related
debts as well as meeting its ongoing
Professional services withholding tax
tax liabilities as they arise in the normal
course In the past, Revenue has generally requested
the original F45/F50 withholding tax
• f or the warehousing arrangement certificates before issuing refunds arising from
to apply, all returns must be filed in PSWT claims. Given the level of remote working
accordance with the Revenue guidance that is being carried out, Revenue has now
that has applied since the start of the advised that it is prepared to accept scanned
current pandemic.”2 copies of the certificates in order to issue the
relevant refunds more quickly.
These warehousing measures should give a
greater degree of certainty to businesses in R&D tax credit
relation to the timeframe for repayment of
On 1 April 2020 Revenue issued an eBrief (No.
deferred VAT and employer PAYE liabilities.
56/2020) stating that it intends to bring forward
the repayment date for excess R&D tax credit
Relevant contracts tax
payables. Under s766(4B)(b) TCA 1997, the
Revenue also announced the suspension of payment date of the relevant instalments of the
the RCT rate review, which usually takes place payable credit cannot be earlier than the due
in April each year.3 This was of relief to many date for the corporation tax return (being 23
sub-contractors, who may not be able to ensure September 2020 for companies with accounting
compliance at this time and on whom the periods ending on 31 December 2019).
allocation of a higher deduction rate could be
punitive. Revenue advised that it will now attempt to
issue these repayments before the corporation
Corporation tax tax return filing date, provided that the
Revenue has continued to update the supportive corporation tax return is filed with the claim
measures in place for businesses outlined on its and subject to the usual verification checks
website. The late filing surcharge will not apply being carried out. We would therefore suggest
to corporation tax returns by companies with that companies that intend to make an R&D
accounting periods ending on or after 30 June claim giving rise to a refund and that have not
2019 until further notice. Revenue will also not yet filed their corporation tax return should do
require these companies to apply restrictions so as soon as possible to have the repayment
on loss relief and group relief as a result of their issued quickly.
corporation tax return being filed late. This
corresponds to corporation tax returns with All of the above measures are welcome
filing deadlines of 23 March 2020 and later. assistance from a tax compliance perspective
2 “Revenue Confirms ‘Warehousing’ of COVID-19 Related Tax Debt for Businesses”, Revenue press release, 2 May 2020.
3 “Covid-19 Information and Advice for Taxpayers and Agents”, https://www.revenue.ie/en/corporate/communications/covid19/index.aspx.88 Covid-19: Tax Liabilities and Cash-Flow Considerations
for businesses experiencing cash-flow Large companies
difficulties during the Covid-19 crisis. We will Preliminary tax payments for large companies
now look at some other useful tips for the are payable in two instalments, the first due
management of tax payments that could help six months after the start of the accounting
businesses at this time. period. For example, the first instalment for a
company with an accounting period ending
Preliminary Tax on 31 December 2020 is due by 23 June 2020.
Small companies This first instalment can be based on (a) 50% of
the corporation tax liability for the prior period
As many companies will be aware, preliminary
(31 December 2019) or (b) 45% of the final
tax payments for small companies (i.e.
corporation tax liability for the current period
with corporation tax liabilities of less than
(31 December 2020).
€200,000) may be based on either (a) 100%
of the corporation tax liability for the prior year
Again, for practical reasons, most large
or (b) 90% of the estimated corporation tax
companies use option (a). However, given
liability for the current year. Businesses tend to
that the business’s turnover may have fallen
base their preliminary tax payment on 100% of
in the first five or six months of 2020, large
the prior-year liability for various reasons, but
companies with accounting periods ending in
generally because they do not anticipate their
December 2020 should consider basing their
profits to decrease significantly in the current
payment on the 45% option, as there may be a
year or they do not have an accurate projection
substantial cash-flow saving.
of their results for the current year.
However, by calculating the preliminary tax
payment for the financial year ending in 2020 Example 2
based on 90% of the profit for that year, Trading Limited’s taxable profit for the year
companies affected by the outbreak of Covid-19 ended on 31 December 2019 was €2.2m. It
could achieve significant cash-flow savings. Small has experienced a loss of €500,000 in the
companies with accounting years ending from first half of 2020 and expects its final taxable
30 June 2020 (preliminary tax payment due on profit for the year ending on 31 December
23 May 2020) onwards should therefore consider 2020 to be €800,000. Based on the 50%
basing their payments on the 90% option. option (31 December 2019), a payment of
€137,500 would be due in June 2020. If the
instalment was based on the 45% option (31
Example 1 December 2020), a payment of €45,000
would be sufficient to satisfy the preliminary
ABC Limited had a tax-adjusted profit of
tax rules based on a final profit of €800,000.
€1m for the year ended on 30 June 2019. The
company has been severely affected by the
outbreak of Covid-19 and expects that its
tax-adjusted profit for the year ending on 30 Prior-year preliminary tax
June 2020 will be €240,000. Based on 100% We mentioned above that companies often
of the prior-year liability, ABC Limited would base their preliminary tax payments on the
need to make a preliminary tax payment higher, prior-year option, even when their
of €125,000 by 23 May 2020. However, if it results for the current year are lower than for
based the preliminary tax payment on 90% the prior year. In such cases a corporation tax
of the expected liability for the current year, refund will arise. Where a company expects that
a payment of €27,000 would satisfy the its tax liability for 2019 will be lower than the
preliminary tax rules based on a final profit preliminary tax paid on account, it should file
of €240,000. its corporation tax return as soon as possible to
crystallise the refund and have it either repaid2020 • Number 02 89
by Revenue or offset against VAT or employer
If ABC Limited did not extend its accounting
PAYE/PRSI liabilities that may arise.
period, any losses arising in 2020 could
potentially be carried back to the 2019
Change of Accounting Period period. However, the company would not
It is worth noting that a company’s accounting get the benefit of these losses until the
period can be extended to a maximum of 18 corporation tax return for 2020 is filed in
months once every five years. As many companies 2021. Hence, extending the accounting
will have suffered a downturn in their business period could have a positive cash-flow
activities in the first half of 2020, they could impact on the business from a corporation
consider whether extending their 2019 accounting tax perspective.
period by six months would be a suitable option,
especially if their accounting period end is usually
towards the end or start of the calendar year. The
Close Company Surcharge
benefit of this extension is that the company’s An effective 15% surcharge applies to
profits in the accounting period 2019 would be undistributed passive income earned by
offset by the reduced profits or potential losses in close companies in Ireland. This surcharge is
the first six months of 2020. payable with the corporation tax liability for the
subsequent period. For example, a company
As a corporation tax return cannot exceed 12 with passive income earned in the year ended
months, a return would still be required for the on 31 December 2018 would have a surcharge
initial 12-month period. However, as profits are payable with the corporation tax liability for the
apportioned between the two periods for year ended on 31 December 2019.
corporation tax purposes in these cases, it can
provide a cash-flow advantage. Payment of this surcharge can be avoided if the
company pays a dividend to its shareholders
within 18 months of the end of the year in
Example 3 which the income was earned (e.g. a dividend
ABC Limited usually makes its financial would be declared by 30 June 2020 for
statements up to 31 December each year. passive income earned in the year ended on
The taxable profit for the year ended on 31 31 December 2018).
December 2019 is €1m, which would give
rise to a corporation tax liability of €125,000, However, Revenue has recently released an
payable by 23 September 2020. ABC eBrief advising companies that it is prepared
Limited’s results for the six months to 30 June to extend the 18-month period for payment of
2020 show a tax-adjusted loss of €200,000. the dividend to 27 months. This means that a
company that would usually declare a dividend
If ABC Limited extended its year-end to by 30 June 2020 now has until 31 March 2021
30 June 2020, the taxable profit for the to declare and pay the necessary dividend. To
18-month accounting period ending on avail of this extension, an application must be
30 June 2020 would be €800,000. The made to Revenue.
corporation tax return and payment for the
initial 12 months ending on 31 December As well as this extension, under s434(7) TCA
2019 would still be due by 23 September 1997, no surcharge should be payable if the
2020, but the taxable profit would be company that earned the passive income
€533,333 (12/18 of €800,000). This would cannot legally make a dividend (i.e. does
give rise to a reduced corporation tax not have distributable reserves). Therefore,
liability of €66,667 payable by 23 September companies with passive income earned in the
2020. The remaining taxable profit of year ended on 31 December 2018 should look at
€266,667 would be returned in a six-month their reserve position as at 30 June 2020 when
corporation tax return by 23 March 2021. considering whether to apply for this extension.90 Covid-19: Tax Liabilities and Cash-Flow Considerations
If the company has been negatively affected by • if the business premises is owned by the
the Covid-19 outbreak, its reserves may have company or the company holds rental
deteriorated into a negative position at that properties, discussing loan repayments with
point. This would avoid the need to apply to the bank as early as possible;
Revenue for the extension and would also mean • availing of the Temporary Wage Subsidy
that the surcharge would not be payable as a Scheme, which aims to maintain the
dividend could not legally be made. employer/employee relationship while giving
employers a temporary reprieve from payroll
Other Considerations costs;
This article has focused primarily on the tax • discussing temporary fixed payment
considerations to help companies with cash- arrangements with debtors and creditors; and
flow management in the coming months, but • reviewing general overheads and determining
there are a range of other steps that they can which costs are essential at present.
take to ease cash-flow worries. We would
recommend that all businesses forecast their Companies should continue to monitor the
results to the end of the year and also consider Revenue website for updates to its measures,
the following: such as the deferral of VAT and employer
PAYE/PRSI payments and the temporary
suspension of late filing surcharges for
• approaching landlords for a temporary
corporation tax returns. This is a difficult time
freeze of or reduction in rents due; for businesses, but measures to help are being
• engaging with local councils in relation to a put in place and enhanced; if businesses can
freeze of rates, in line with the Government’s survive these tough few months, hopefully they
announcement of a three-month rates freeze; will see strong trading resume in late 2020.
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