Irish businesses are contending with numerous headwinds as they face into 2023, according to Mazars tax director Alan McManus. These include the lingering adverse impact of Brexit, elevated inflation and rising interest rates, a global economic downturn and impending far-reaching changes to the VAT system.
“We are facing into a recession,” says McManus. “We may do better than the rest of Europe, but we must prepare for it. Inflation is feeding into funding costs for business due to higher interest rates.”
Hospitality and other consumer sectors may face particular difficulties. “Discretionary spend is contracting, and this will hit sectors like retail and hospitality. We could see redundancies there. The restoration of the VAT rate to 13.5 per cent will impact the hospitality sector. The ending of measures like VAT not applied to Covid19-related healthcare products will feed through to overall inflation.”
Energy subventions and reductions in excise rates on fuel will also come to an end, he points out. “There is pressure from within Government to return to previous levels of VAT and excise in meeting climate protection targets. Any increases there will pass through directly to the consumer.”
Construction is another sector facing difficulties. “Activity has been falling rapidly. There is a skills shortage and a reduction in available funding. The contraction in purchasing power is also affecting demand for housing. Demand for commercial property has been affected by new working arrangements and contraction in headcount numbers by tech and pharma companies. Businesses still pay substantial rent for offices even when they are only partly occupied, so where will the appetite for new space come from?”
It is not all bad news though. “There is a sense of optimism starting to build on the level of inflation. I don’t see it going back towards neutral rates, but it will plateau, and the rate will stabilise. However, global issues like energy prices, geopolitical uncertainty, and ongoing supply chain issues will feed into it and keep the rate quite high throughout 2023.”
Businesses should continue to put pressure on respective governments and the EU to get Brexit sorted. The Trade & Cooperation Agreement wasn’t a good agreement for anyone. It just doesn’t work in practice.— Alan McManus, Mazars tax director
Businesses will need to respond. “One way is to try to look to manage costs and improve productivity while growing revenues. Potentially that means adjusting headcounts and scope of job responsibility if there is capacity to do that. Adopting cost-reduction strategies such as AI related solutions is another option. Businesses can look at outsourcing to cut costs, but this needs to be selective in targeting suitable areas with a view to maintaining premium client service levels otherwise it can have an adverse effect.
Seeking opportunities post Brexit to grow and compete in other markets with support from Government agencies should assist with revenue growth”.
At a macro level, businesses can seek to influence the environment. “They should continue to put pressure on respective governments and the EU to get Brexit sorted. The Trade & Cooperation Agreement wasn’t a good agreement for anyone. It just doesn’t work in practice. People now realise that they will have to go back and fix it. There are hopeful signs regarding the Northern Ireland Protocol, and a practical resolution to that issue will be helpful for business.”
Another bright spot is the public finances, which are in rude health at present. “The corporate tax windfall in 2022 contributed to an Exchequer surplus of €5 billion. Looking into 2023, there will potentially be another major windfall across all the tax heads.”
The question is how that surplus can be used to support the economy. “At present Ireland is presented with a situation where the country is heading into a recessionary cycle with high inflation. People will seek Government intervention. Economic convention indicates that fiscal stimulus at a time of high inflation isn’t a good thing and compounds the issue. Targeted support is necessary for the vulnerable members of our society and to help sustain well managed businesses. Government needs to adopt a prudent approach on spending with a continuing focus on investment in strategic infrastructure including energy and transport while looking to the reform of the personal taxation system to support employment and to improve the net income spending capacity of workers that is good for the economy.”
Finally, the European Commission launched its long-awaited proposals to modernise the VAT rules within the EU. Known as the VAT in the Digital Age (Vida) package, it will cover several areas, including digital reporting and e-invoicing, the platform economy, and the single VAT registration.
“Although it won’t become a reality until 2025 at the earliest, there is still substantial work to be done in advance of the quite complex changes,” McManus points out. “Similar to the Brexit challenges encountered by businesses, competitive advantage can be garnered by better preparation and upfront investment in advance of the anticipated changes.”
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Contact Alan McManus to learn more about Vida.