Another financial year has flashed by and all businesses will soon know if they have paid sufficient provisional tax during the year.
A short payment of tax is often the result when your provisional tax payments made during the year fall short of your actual tax due – usually where you have had an increase in profitability over the previous year. A short payment of tax is also caused when you miss making a payment that you should have. In this situation you are likely to not only have Use of Money Interest (UOMI) imposed, but additional tax too.
Thankfully there have been some changes to the way Inland Revenue treat short payments of income tax which will take some of the ‘sting’ out of Inland Revenue’s imposed UOMI rate and calculation.
Companies and Trusts now have a ‘safe harbour’ level similar to that which has been available for individuals for many years. As long as you have met all your tax payment obligations and are within the ‘safe harbour’ level, UOMI may not apply.
What if you would prefer to prevent the uncertainty around tax time and pay based on your current year earnings? Recently, Inland Revenue have introduced AIM (Accounting Income Method) – which is available to small businesses and designed to synchronise your provisional tax payments with your GST periods and the profitability of your business. For more information please refer to the IRD website.
Similar to AIM, is the ability to pay provisional tax using the GST Ratio method. Like AIM, the GST Ratio method allows for the payment of provisional tax with your GST payments.
Neither of these will suit all small businesses (we have a mixed use of these in our office) so it is best to consult with your accountant to see if either may be of benefit to you.
However, what can you do if you can’t avoid the implication of UOMI? Your accountant may consider tax pooling where tax can be ‘bought’ or ‘financed’ and a tax intermediary used to pay your tax on the actual due date, as if the money had been paid by you on time. The interest charges are significantly lower than Inland Revenue’s and you avoid any nasty additional tax penalties.
Tax Finance is used to pay for future tax payments. You select the amount of time required to finance the payment and pay only the finance cost up front. The principal balance is due at the end of the finance period or as soon as cash is available. Again, the interest cost is lower than Inland Revenue charges and the payment is made on the due date so you avoid any late penalties. There are no credit applications or security.
Tax Buying is where you can purchase historical tax which may have been the result of having an excellent business year, an IRD audit or you have found an error and want to make a voluntary discloser. This is a relatively easy process with one tax intermediary stating savings of approximately 30% over Inland Revenue’s UOMI can be achieved.
Another option is your accountant working with you and your bank to secure the finance needed to pay your tax. This may be short term or long term finance.
The message here is that you have options and the sooner you discuss these or communicate any issues you have with taking care of your tax responsibilities with your accountant, the sooner a plan of action can be put in place.