VAT system limits capital says ISME

VALUE added tax is imposing serious limitations on business working capital, according to the Irish Small and Medium Enterprises Association (ISME).

The problem is caused by the standard level in Ireland of 21 per cent compared with 17.5 per cent in Britain.

ISME notes that up to December 31st, 1992, many firms were entitled to pay VAT on a cash receipts basis, thereby transferring to the exchequer the VAT element on any invoice when it was received.

However, since then virtually all traders have to pay VAT within an average of five weeks of the invoice being issued, irrespective of when the invoice is paid.

VAT then becomes a liability before any value has been added to the company.

Mr Don Curry, ISME's chairman, said the biggest burden facing business was lack of working capital. But the VAT legislation made the struggle to manage cash flows even more difficult.

He pointed out that many companies with a turnover of between £1 million and £2 million were liable to be permanently restricted in their cash flow of some £50,000, solely because of the requirement to transfer the VAT element of their invoices before they had been paid.

The problem is compounded when the companies trade with local authorities, commercial semi state companies or health boards.

Here payment delays can be from six to nine months, ISME claimed.

The association is now recommending that the ceiling payment of VAT on a cash receipts basis should be made available to businesses with a turnover of up to £2 million per annum.

ISME believes any potential loss of revenue to the exchequer could be made by putting all companies benefiting from the change on a monthly VAT return basis, rather than the current twomonthly period.