Belly up due to VAT

Studies predicted it, and it is now becoming a reality: the economic crisis caused by the COVID-19 pandemic has become a liquidity crisis. For companies trying to shift up a gear, this is a nightmare. While their invoice payments are delayed if paid at all, they nonetheless need to meet their own financial obligations in good time. A company that can’t pay on time is declared bankrupt or at least flirting with insolvency. This is like death row in business terms. It is not easy for a company facing difficulties at an early stage to avoid that path. The tiniest push or the slightest financial setback is enough to send such a vulnerable company belly up.

In the current circumstances, we have every interest in companies remaining financially healthy. The government understands this and is taking measures. But at the same time, the VAT legislation is a financial disaster for any company struggling to keep afloat. Whether or not their invoices have been paid, companies must pay the VAT on these invoices to the tax authorities when they file the next VAT return. In a cash-flow crisis, it should come as no surprise that companies do not always manage to pay within 15 days of the VAT return.

“The VAT legislation is a financial disaster for any company already struggling to keep afloat.”

One could argue that it is not up to the tax legislator to save a company. For sure, but we can also say with the same certainty that it is not for the tax authorities to hang a millstone around the neck of companies to precipitate their collapse. Yet, that is precisely what the VAT legislation is doing. If a company cannot pay the VAT on time, it will be penalised twice. There is a 15 percent fine on late payment. And as if that were not enough, a further 9.6 percent late payment interest is charged.

Such sanctions are particularly severe in normal times. Knowing that, we cannot but label these measures as criminal in times of liquidity crisis. It goes without saying that many companies will plead to have fines and penalty interest waived. Even though that is not entirely impossible, the VAT administration is very strict. It did not budge either during the 2008 credit crisis. Then, too, the fines and interest were a first step towards bankruptcy for many companies.

Things can be different this time around, however. A simple comparison with our northern neighbours will suffice to illustrate this point. The Netherlands does not impose a fine for late payment of VAT, while default interest is due. In normal times, that rate is 4 percent in the Netherlands, a lot less than the 9.6 percent in Belgium. The rational Dutch have gone one step further and lowered the rate to 0.01 percent, because of the coronavirus crisis. The contrast with Belgium could hardly be greater. And we have not yet talked about the special liability mechanisms available to the Belgian tax authorities. Here, managers are also threatened with joint and several liability for non-payment of VAT. Many tax specialists and accountants therefore rightly wonder what we are actually doing in our country.

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