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Life in the time of Covid-19: Maximising tax cash savings - Ireland

  • Ireland

    17-07-2020

    Introduction

    It is often said that cash flow is the lifeblood of business. The impact of Covid-19 has shown us the truth of that statement and how vital cash is to the continued success of business. As Ireland continues to renew and reignite its economy following Covid-19, one message is clear: businesses will need to ensure that focus is maintained on managing cash flows as efficiently as possible.

    If properly managed, significant cash savings can be yielded from a tax perspective. In particular, in the short to medium term, a business may be able to employ a range of tax strategies in order to improve its cash flow as part of a broader review of its overall cash position.  These strategies can include triggering any available tax refunds or repayments due as early as possible, as well as reducing or even deferring tax payments arising, where possible. Businesses can also seek to avail from a number of the continuing tax measures initially introduced by Irish Revenue in response to the Covid-19 pandemic.

    Set out below is a high-level overview of some of the key tax areas which may offer opportunities for Irish based corporates to improve and maximise cash flow from a tax perspective.

    16 July 2020

    Tax

    Comments

    Corporation tax

    Early submission of corporation tax returns

    • Submission of the company’s corporation tax return can assist in speeding up any tax repayment or refund due. For example, while Irish Revenue have confirmed that the repayment date for excess R&D tax credit payments has been brought forward, the Form CT1 with the relevant claim must have been filed in advance in order to avail of the repayment (please see further below).

    Basis for preliminary tax payments

    • Companies with a corporation tax liability of less than €200,000 (known as ‘small companies’) have the option of basing their preliminary corporation tax liability on 100% of the corporation tax liability for the prior tax period. Non-small companies may also base their first preliminary corporation tax payment on 50% of the corporation tax liability for the prior period. While companies would tend to avail of these options under normal circumstances, given that turnover may have fallen significantly in the first half of 2020 due to Covid-19, small and non-small companies should consider basing their preliminary corporation tax payment on the current (as opposed to prior) year basis, notwithstanding the above options.

    Extension of accounting period

    • A company may extend its accounting period to a maximum of 18 months once every five years. As turnover may have fallen in the first half of 2020 due to Covid-19, extending the 2019 accounting period in this manner can offset the company’s 2019 profits against any potential losses in the first half of 2020. In these circumstances, while separate corporation tax returns will still need to be filed in respect of the initial 12-month period and the subsequent six-month period, as the profits are apportioned between the two tax periods, this should result in a cash flow advantage for the company.

    Carry back of tax losses

    • Consideration should be given to making a claim to carry back any losses incurred to a prior period in order to generate a refund of corporation tax paid in the prior period. Such claim must be made within two years of the end of the loss period.

    Excess R&D tax credits

    • Where R&D tax credits (available at 25% of qualifying R&D expenditure) are not fully utilised in the current period, the excess tax credits may be offset against the corporation tax liability of a prior period of corresponding length (resulting in a corporation tax refund). Any balance of tax credits remaining can then form the basis of a repayment in three instalments. As mentioned above, Irish Revenue have brought forward the payment date for repayments in respect of excess R&D tax credits (normally 23 September for companies with accounting periods ending on 31 December).

    Maximise claims for capital allowances

    • A review of the company’s tax depreciation position may identify areas where capital allowances have not been claimed, or have been under claimed, in error in respect of certain assets (such as plant and machinery). Any opportunities to avail of accelerated capital allowances (such as in respect of energy efficient equipment) should also be considered.

    Value added tax (VAT)

    Maximise VAT recovery

    • Companies can seek to maximise their VAT recovery in a number of ways. For example, a review of the company’s accounts payable may identify areas where VAT has been incurred but not recovered correctly in the company’s VAT filings. Also, where a company has restricted input VAT recovery, the benefits of adopting a different recovery methodology for dual-use inputs where appropriate (for example, a methodology based on the number of employees, as opposed to turnover) should be explored.

    Bad debt relief

    • In the current climate, increased bad debts is a dilemma faced by a lot of businesses. Where a decision has been made to write-off an irrecoverable debt, the company should ensure that relief in respect of the VAT paid on the original supply is claimed where available.

    Zero VAT rating authorisation

    • Qualifying businesses which hold a VAT56B authorisation benefit from a significant cash flow benefit by being entitled to receive certain goods and services from Irish suppliers (as well as the importation of goods) at the zero rate of VAT.

    VAT grouping

    • Forming a VAT group may offer substantial VAT savings, especially where there are considerable costs being charged between related entities.

    Tax warehousing scheme

    • Where the company has accrued VAT liabilities in respect of the Covid-19 period (ie from 1 March 2020 until the relevant sectoral restrictions are lifted), such liabilities may be parked for 12 months without accruing interest under the recently announced tax warehousing scheme. After this period has ended, interest at a reduced rate of 3% (normally 10%) will apply until the debt has been discharged. Irish Revenue have confirmed that the timeframe allowed to pay the warehoused debt will be flexible so as to allow companies to meet their ongoing tax liabilities as they fall due. All relevant tax returns must be submitted in order to avail of the tax warehousing scheme.

     

    Payroll taxes

    From a payroll tax perspective, a number of opportunities may be available in the form of an employer PRSI saving (which at a rate of up to 11.05% at present represents a significant saving for any business, regardless of size).

    Review of travel and subsistence

    • The robustness of the company’s travel and subsistence expenses policy should be tested to ensure that tax is not being operated incorrectly on such payments, or if minor changes to the process can be made such that these expenses can be paid on a tax-free basis in line with Irish Revenue guidance.

    Provision of tax-free benefits

    • A review of current benefits provided by the company can assist in identifying whether any tax-free benefits may offer an appropriate incentive for staff. This could include the provision of travel passes or introducing the bike-to-work scheme if not currently utilised. The annual small gift exemption which allows a non-cash benefit of up to €500 to be paid on a tax-free basis may represent a tax efficient reward system for staff.

    Shared-based remuneration

    • There is a wide range of shared-based schemes which could be considered as a method of minimising both the company and its employees’ tax liabilities.

    Tax warehousing

    • The tax warehousing scheme mentioned above also applies to unpaid payroll tax liabilities incurred in the Covid-19 period.

    Miscellaneous

    Temporary Wage Subsidy Scheme (TWSS)

    • The TWSS provides financial support to businesses affected by Covid-19. Where a company may not have been eligible for the scheme previously, this should be closely monitored an on ongoing basis in case the company’s circumstances change (especially taking into account recent reports that the TWSS may be extended as far as April 2021).

    Professional services withholding tax (PSWT)

    • While in the past Irish Revenue have insisted on receiving the original F45/F50 withholding tax certificates in order to process refunds of PSWT, it has been confirmed that scanned copies of the relevant certificates will be accepted in order for such refunds to be issued more quickly.

    Timely filing of tax returns

    • In addition to facilitating the early payment of tax refunds and repayments more quickly (such as in the case of excess R&D tax credit payments, as mentioned above), the timely filing of tax returns generally should ensure that the company avoids unnecessarily incurring interest, surcharges and penalties where tax deadlines are missed.

    For further information, please contact:

    Alan Connell, Managing Partner and Head of Tax - alanconnell@eversheds-sutherland.ie

    Robert Dever, Associate in our Tax department - robertdever@eversheds-sutherland.ie