Business owners who have to repay unearned COVID grants are battling the taxman

Tzameret Dvir Avivi, 47, is a music teacher at a kindergarten in central Israel. She brings maracas, castanets and small drums to 3-year-old mini-pupils, brightening up their daily routines.

Avivi, who has been teaching music since 2008 as a freelance professional, saw her workload plummet in 2020 as the COVID-19 pandemic swept through Israel, closing schools and businesses amid restrictions aimed at keeping the deadly virus going. from a distance.

“In 2020, I only worked for three months,” Avivi said in a phone interview with The Times of Israel.

Lockdown measures in Israel, which began in mid-March 2020, brought the economy to a virtual standstill. Unemployment figures rose from a record low of less than 4% in early March to some 28% in late April as many businesses were forced to close. The number of unemployed exceeded one million for the first time in Israel’s history, 85% of whom were placed on unpaid leave (furlough).

When the shutdowns took hold, the government paid monthly benefits to furloughed employees, but financial aid ignored the self-employed, small business owners and freelancers. It was only after these professionals took to the streets to protest that a law was passed giving them grants to help them survive the pandemic economically.

According to legislation passed in 2020 and 2021, small businesses and self-employed people who saw a 25% drop in turnover during confinement periods and 40% between confinements, compared to the same periods in 2019, could receive a government grant. The subsidies were granted solely on the basis of the estimates and declarations of the companies themselves, without any proof of a drop in turnover being required in real time. The idea was to immediately inject much-needed funds into these companies to prevent them from going under, while a final settlement would come later.

Then-Prime Minister Benjamin Netanyahu (center) and Finance Minister Israel Katz (right) meet with representatives of Israeli self-employed workers and small business owners at the Prime Minister’s Office in Jerusalem, July 10, 2020. (PMO)

The grants were calculated (Hebrew) and issued to businesses, freelancers and freelancers every two months, based on an estimate of the decline in turnover compared to the same periods in 2019.

If these companies later show a turnover higher than that initially estimated by the owners, they would have to reimburse the tax authority for the funds they received for the months in which the subsidies were overpaid.

As Avivi’s revenue dropped by around 90% in 2020, it received a government subsidy of NIS 17,000 for each two-month period. But because in June 2020 she was paid for the months of January and February, during which she had worked, her drop in turnover over the period May-June was around 38%, just below of the 40% threshold set by law that would have made him eligible for a subsidy for this two-month period.

“So now, because I’m only 2% below the 40% revenue decline limit, I have to repay the full amount of NIS 17,000 to the government,” she said. “Instead of allowing me to pay back only the 2% difference, I had to pay back the full amount.”

The struggle of the independents

Avivi has been actively advocating for the rights of the self-employed during the pandemic by helping them apply for unemployment benefits and obtain the aforementioned grants, and is now fighting to change the terms of reimbursement in coronavirus grant legislation.

“Independents are and always have been second-class citizens and we don’t have the same rights as everyone else. Nobody takes care of us,” she said.

Salaried workers who were laid off during the pandemic received unemployment benefits from the National Insurance Institute and could perform clandestine work or take vacations while receiving the benefits, she said. But the independents “made an effort to work. We have houses and children and our business and fixed expenses. We didn’t sit on the beach like some employees might.

Independent Israelis demonstrate in Rabin Square in Tel Aviv, calling for financial support from the Israeli government in the face of the coronavirus pandemic, July 11, 2020. (Miriam Alster/Flash90)

The Israel Federation of Small Business Organizations, led by its president Roee Cohen – which took the plight of the self-employed to the streets in 2020 – is now waging a battle to have turnover drops calculated annually, rather than on a fortnightly basis. , and on a differential basis. This would mean that someone whose revenue drop is below the threshold set by law would only refund the difference and not the full payment.

“It shouldn’t be a zero-sum game, like it is right now,” Cohen said. “If someone shows a 38% drop in turnover, just 2% below the 40% limit, they are not entitled to anything. Why should they reimburse the full amount? A company that sees its income drop by 38% cannot survive either.

The tax office “wants to make life easier,” Cohen said, because differential refunds are more complicated to manage. “There are now some 100,000 companies that owe money for certain periods,” he added. “The calculation system is unfair.”

Moreover, because government subsidies are tied to inflation, the amounts some small businesses have to repay have skyrocketed, with inflation rising in Israel and around the world.

According to data released by the Central Bureau of Statistics in March, inflation rose 3.5% in the 12 months to March 2022 and 1.5% since the start of the year. The Bank of Israel forecast that the inflation rate in 2022 will be 3.6%, 2 percentage points higher than a previous forecast. This will add thousands of shekels to the payments due.

Daniella, a 54-year-old single front-end website builder, said she owed the tax office NIS 48,000 ($14,000) in overpaid subsidies. She chose not to make her surname public for privacy reasons. She has suffered from multiple sclerosis since 2005 and she and her mother, whom she takes care of, have heart problems.

Israelis like to dine in restaurants in Tel Aviv as they reopened earlier this week after a long period of lockdown. March 11, 2021. (Miriam Alster/FLASH90)

“I used to work with a lot of overseas clients, but once the coronavirus hit, those either closed or needed less work,” she said. Due to her illness, she could not work outside the home, she said. She sent a CV every day in search of a job, but to no avail, so she applied for and received the subsidies from the tax office.

Then finally in 2021, she started working with a foreign client, in a role she shared with two colleagues. To simplify, it was she alone who issued the invoice for the work, even though the product of the project was shared. Now the tax authorities are asking her to repay the subsidies she received.

She showed them receipts proving the work was shared with others, she said, but regardless, she has to pay back the NIS 48,000 by October and will struggle to do so. .

Debt recovery

The tax administration has authorized companies to come a deal (in Hebrew) regarding overpaid grants that allow gradual repayment of funds until December 2022. If the total amount owed is more than NIS 15,000, the authority said on its website, companies can pay in installments until June 31, 2023.

The authority said it plans to start enforcing debt collection soon, but until the end of June the focus will be on grant recipients who have actually seen an increase in their turnover. or a decline of 10% or less. But even those individuals and companies can still come to an agreement on payment terms, the authority said.

The tax authority has so far received refunds of around NIS 1.5 billion (about $455 million) from recipients, without any enforcement, a person from Israel told The Times of Israel. the tax administration close to the file. The authority still owes a few billion shekels in excess subsidies, the person said, out of a total of about 40 billion shekels ($12 billion) in subsidies it paid out during the pandemic.

Tax administration offices in Jerusalem. December 1, 2019. (Olivier Fitoussi/Flash90)

“The law set out clear criteria by which grants would be awarded, based solely on the estimation and reporting of freelancers and businesses,” the source said. Post facto, some of these companies have experienced a lower than expected drop in turnover, and therefore have to reimburse this money.

“We provided a very comfortable refund payment period and took no enforcement action,” the person added.

According to tax authority estimates, half of overpaid grants in cases that failed to meet ex-post requirements went to people and businesses that saw an increase – not a decrease – in revenue. , the person said. “They got some sort of interest-free loan out of taxpayers’ money for several years and now they have to pay it back,” the person said.

The law sets clear criteria for getting the subsidy — a 25% and 40% drop, the person said. “You can’t decide not to return the money you have to pay back by law. Grants are taxpayers’ money.

If the law is now changed to allow differential calculus, the person noted, then people who rightly did not apply for grants because they did not meet the criteria specified by the law will have been discriminated against.

The tax authority said in a statement that it had “even granted many concessions in this matter, with maximum consideration, even if it concerns people who submitted an incorrect declaration for the subsidies”.

The authority pointed out that although the deadline for refunding the subsidies under a mitigating mechanism that it proposed has passed, debtors who have not paid by this date can contact the tax services and reach an individual arrangement under the usual conditions for the recovery of tax debts, taking into account the circumstances of each case.

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