Business owners not being able to pay their tax is an all too often occurrence, but hey, it may not be as disastrous as you think.
The worst thing you can do in these circumstances is to do nothing. Yes, I know that getting credit from the IRD is all too easy, but it will cost you plenty because not only will the IRD charge you interest and hefty penalties as well that keep on coming like a steam train. Over a longer period the addition of penalties and interest can nearly double the amount you owe.
These are the four most common courses of action you can take if you can’t pay your tax:
Temporary Bank Facilities
This needs a good track record, sufficient security to secure the borrowings and good systems i.e. to be able to supply up-to-date and interim financials. This works best if you already have a borrowing facility with everything already in place.
However, this strategy has a high failure rate because bank managers are not usually impressed by urgent last-minute requests for finance, which normally indicates a lack of planning and forethought!
Arrangements with the IRD
If the arrangements will be for less than two years the IRD are reasonably accommodating in agreeing arrangements to pay in instalments unless you have a very bad track record of tax paid late or failing to adhere to previous arrangements. Even here it’s possible to agree to a temporary arrangement which, if you stick to it, can be turned into a permanent one.
The advantage of an arrangement is that the IRD only charge you the late payment interest which isn’t too bad (currently 9 percent odd) and not the nasty 1 percent and 4 percent penalties. The downside is that it won’t be long until the next tax payment date comes around so that it all concertinas together before you’ve paid off the instalments for the previous tax bill.
Tax pooling is a service allowed by the IRD that allows tax payers to reduce their exposure to interest and penalty costs – what a surprise, considering they’re only too keen normally to pile them on!
As the name suggests taxpayers place their provisional tax payments in a pool account held at the IRD. Amounts in this pool are held on trust by an independent trustee and the company that operates the tax pool is called a Tax Pool Intermediary. When it’s time to file their tax return, taxpayers who have made payments into the tax pool transfer what they need for themselves from their tax pool deposits and any surplus amounts are then able to be traded with other tax payers for improved interest returns. Other taxpayers acquire those credits because buying someone else’s surplus provisional tax extinguishes their liability to the IRD and does this at a lower cost than the IRD’s interest rates.
For those who can’t pay their tax, tax pooling has two advantages, firstly the interest charged by the tax pool intermediary is less than that charged by the IRD, and secondly no penalties are charged because the tax is treated as being paid on the date it fell due.
So basically, using tax pooling, in return for a very reasonable rate of interest you can pay your tax late without incurring any penalties. How good is that?
If the amount you owe to the IRD has grown to a level that is out of control and you possess little or no assets, it is possible to get the IRD to write the tax off as uncollectible. It’s not easy to get the IRD interested and it’s a long process with no guarantee of a successful outcome, but if successful it sure beats bankruptcy and paying off the tax for the rest of your life!
Beyond these four areas, if not being able to pay your tax is becoming a regular event, obviously your business has some problems, whether excess drawings, no budgeting, or no tax planning or not saving sensibly for the tax.
Often I find the problem is not being able to pay the tax, it’s the fact that the tax wasn’t anticipated or that nothing has been saved towards it. This could mean you don’t listen to your accountant or perhaps you need a new one!
If you struggle to pay your tax, seek advice, there may be a solution, we are more than happy to discuss your options with you, and share our expert knowledge.