We want to give you an update on Debt Warehousing as period 2 draws to a close for most businesses.
You will need to act in the coming months to plan to pay the taxes owed. This information is to help you understand the background and next steps.
We will look at
- Overview – taxes involved
- Period 2 – Lolo Ferrari Ltd
- Phased Payment Arrangement – Option 1
- Phased Payment Arrangement – Option 2
- Consider your options
- Summary
Overview – Taxes Involved
“You must pay taxes. But there’s no law that says you gotta leave a tip” Morgan Stanley advert
Revenue introduced some schemes to help businesses navigate the choppy waters of Covid. March 2020 was a very worrying time with all non-essential businesses closing. One of the schemes introduced was debt warehousing. It was to help business park Revenue debts.
At the outset, the taxes were Vat and PAYE. Other taxes came under the scheme later. These were
- Temporary Wage Subsidy Scheme [TWSS] overpayments
- Employee Wage Subsidy Scheme [EWSS] overpayments and
- Certain Income Tax liabilities
The scheme operates with different periods. Period 1 had a different start date for the various taxes
- 1 January 2020 for VAT
- 1 February 2020 for Employer’s PAYE
- After 26th March 2020 for TWSS overpayments and
- After 1 September 2020 for EWSS overpayments
The key issue for businesses during period 1 was to continue to file their Vat and PAYE returns as normal. But those businesses could park the Revenue debt. Revenue, in turn, didn’t hinder the business and allowed tax clearance. For the majority of businesses Period 1 ended on the 31st of December 202
Period 2 – Lolo Ferrari Ltd
Period 2 runs from 1 January 2022 until 31 December 2022. To remain in the Debt warehousing scheme taxpayers had to keep up to date with current taxes. During period 2 no interest applies to the taxes warehoused by the business. We are now coming to the end of Period 2 and must enter a payment plan with Revenue
We introduce you to Lolo Ferrari Ltd and take you on Lolo’s journey through Debt Warehousing. She has 10 employees and her average monthly PAYE liability at the start of Covid was €7000 per month. Her bi-monthly Vat bill was averaging at €15000. She decided to avail of debt warehousing to get the cashflow advantage early doors. She also qualified for the TWSS and used this from April to August 2020. Business got back to normal levels in late 2020.
The Tax debts her company warehoused were as follows
| PAYE | Feb 2020 to Dec 2020 | €40000 |
| Vat | Jan 2020 to Dec 2020 | €55000 |
| TWSS | Overpayment | €5000 |
| Income Tax | Lolo for 2020 | €10000 |
| Total | €110000 |
Business returned to normal levels in 2021. Lolo decided her company would pay all current tax debts as it had the funds to do it.
For Lolo’s company, it is now coming to the end of period 2 and she must plan to pay Revenue the debt of €110,000.
Phased Payment Arrangement [PPA] – Option 1
The company saved €60000 towards the tax debts but Lolo is not sure what way to pay. She asks for our help, and we come up with two options. Our understanding of the normal PPA arrangement to pay warehoused tax debt is
- A down payment of 25%
- Pay the balance over 3 years at 3%
| Down Payment | 25% of €110000 | €27500 |
| Balance of Tax debt | €82500 and interest €7500 | €90000 |
| Monthly payment | 36 months of | €2500 |
The benefit of this for her is that of the €60000 saved she has only used €27500. This leaves her with €32500 which she can use to fund the first 13 payments. It can also give her a buffer in the event of future shocks to the business. If she needs finance for a project, she is sure she won’t get it at 3%
Phased Payment Arrangement [PPA] – Option 2
Pay all PAYE now of €40000. Included in the PAYE debt is €10000 which relates to Lolo’s salary for 2020. So, if she pays the PAYE in full her 2020 Income Tax liability will disappear too. The reason she has that liability is as a company director she couldn’t get credit for the PAYE on her salary. The reason for that is that the company didn’t pay it.
| PAYE | Pay in full now | €40000 |
| VAT and TWSS | Balance to pay | €60000 |
| Down payment | 25% of €60000 | €15000 |
| Balance | €45000 and interest €4000 | €49000 |
| Monthly payment | 36 months of | €1361 |
The benefit of paying the PAYE in full is that it eliminates the Income Tax liability in full too. Her monthly repayment reduces by €1140, and she saves €3500 in interest. The main disadvantage is that she uses more of her available cash. She will have €5000 left of the €60000 under option 2 but €32500 under option 1.
PPA – Outside the norm
Revenue are aware that there will be businesses that can’t pay under the normal terms. As in they won’t have enough funds for a 25% down payment or will look to spread the repayments over a longer period. This can be up to 5 years. For PPA arrangements outside the norm, the taxpayer will have to engage with Revenue. To get approval it is likely Revenue will look for more information. This can include
- Last 6 months of bank statements
- List of assets and liabilities
- Cashflow projections
- Cost-cutting measures introduced
- Up-to-date management accounts
From a Revenue perspective, the risk is greater with
- higher debt
- a lower down payment and
- a longer repayment period
As such they will look for more documentation and engagement before approval. Under normal payment terms, there should be no engagement with Revenue.
Consider your options
No business likes debt, and the default position is to get rid of it asap. Especially when it is Revenue you owe the money to! It is important to consider your options and some issues to be aware of are
- Will you need to hoard some cash for increasing energy bills and other costs over the next few months?
- If you need to finance a project, there is a time cost to apply for funds. Will you get the funds and what is the likely interest rate?
- The interest rate for debt warehousing at 3% is attractive
- Should you clear all the PAYE debt first and if so, will that benefit you as a director? Will it get rid of an Income Tax liability you have?
- Can the business afford the higher monthly repayments if you opt for the 25% down payment?
- Normal payment terms to clear the debt will save time and energy. Remember there should be no engagement with Revenue looking for extra documentation
- Are your current tax returns and payments up to date? To avail of the benefits of debt warehousing, they must be. If not, Revenue can kick you out and warehoused debts become repayable at an interest rate of up to 10%.
- Don’t pay warehoused debt now and leave current tax liabilities outstanding.
- If you are in funds to clear the whole lot then you save the interest, save time, and have no Revenue debt owing. A very happy place!
Summary
As for Lolo, she’s happy to go with option 2. Her preference is to use the funds to clear the PAYE in full and have a lower monthly repayment. She is confident about the future and has no projects planned where she would need bank finance.
Revenue will be engaging with taxpayers who have warehoused tax debts in the weeks ahead. Expect the letters and the phone calls. So, engage early and get help from your advisors.
You have options and the more you have put away the better. If you haven’t enough funds to enter a normal PPA arrangement, engaging early will be very important. Provide the backup information documentation and do your best to get a PPA over the line that is workable and realistic.
Further guidance will issue in the next few weeks about PAYE debt and the impact of repayments for company directors.
We will help our clients to decide on the best options for them and to put a PPA in place. Need this type of service from your accountant? If so, Start Here
