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Exchequer returns May 2020 – Peter Vale commentary

Peter Vale Peter Vale

The latest Exchequer returns make for very interesting reading, primarily because they are much better than expected.

We expected to see a big dip in income tax receipts in May as redundancies in April fed through into tax returns. Instead, income tax receipts in May were less than 8% behind May 2019. Taking into the account the ability of many companies to defer income tax payments, this is quite a remarkable performance. It is over 50% ahead of the revised forecast for May set by the Department.

While VAT returns in May dipped 35% on the same month last year, this is still well short of the 50% drop in March, the most recent previous “VAT month”. Again, the figure for VAT for May is over 50% higher than anticipated by the Department after figures were revised for the impact of COVID. The dip in VAT receipts reflects both lower consumer spending and also the deferral of VAT payments by many businesses. The latter is a timing issue only and should result in the deferred VAT crystallising from next year.

The income tax figures in particular are very surprising. An interesting explanation from the Department is that it relates to the progressivity of our tax system. In short, tax payments from higher earners held up better and may have made up for the drop in tax receipts arising as a result of many lower earners being made redundant. 

What the figures do show is just how difficult it is to predict tax receipts in the current climate. However, despite the better than expected figures in May, there is still an expectation that figures for the full year will show a significant decline on last year.

Equally surprising was the very strong showing on the corporation tax front in May, with receipts over €1bn ahead of the same month last year. This is another remarkable statistic. 

The Department cautions that June corporation tax figures will provide a better indication of the trend for the full year, but the strong May figures will be a surprise to many. It appears to be linked to large payments by a small number of companies. It may also in part be explained by large migrations of Intellectual Property to Ireland in recent years as companies moved to transfer their IP “onshore” and away from tax havens. The valuable IP would generate significant new taxable profits in Ireland, even after the availability of IP related tax allowances. This may now be feeding into tax receipts.

June will tell us a lot more about the future trajectory of corporation tax receipts as payments in June will reflect expected results for 2020. However the position year to date is very encouraging.

Overall, tax receipts at the end of May are practically identical to the equivalent period in 2019. This is quite an achievement given the COVID19 backdrop and driven by large corporation tax surpluses and a strong start to the year across all taxes. It also reflects much more resilient than expected income tax receipts.

Despite the Department’s comments, it is difficult to rationalise how the tax figures have held up so well, in particular income tax receipts. So at this point it is a case of cautious optimism, with the next set of numbers again keenly awaited.