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Keeping on top of tax payments can be challenging for some businesses. We look at examples of temporary issues that many businesses encounter and explore ways to overcome them.
Rapidly growing business usually require greater working capital to meet the demands of increased payments to suppliers, wages, taxation and capital expenditure. If additional working capital facilities have not been put in place, we often find that IRD payments are, dangerously, given a lesser priority with business owners focusing instead on maintaining the supply of products or services and paying wages.
Similarly, the cash flow for under performing businesses usually reflects insufficient revenue generated to meet costs. Those business owners who haven’t scaled back production and overheads to match reduced demand are likely to face hard decisions around prioritising payments.
In situations where cash flow has not kept up with tax obligations, it is best to contact your advisor and discuss notifying the IRD before a tax payment is missed. Keep in mind that tax returns still need to be filed as they fall due, even if making payment by the due date is unlikely. By contacting the IRD before the due date and continuing to file on time, the taxpayer may be eligible for reduced penalties, and will be in a good position to work with the IRD to get payments back up to date.
It is important to be aware that the IRD ranks as a preferential creditor regarding any overdue PAYE or GST. Any related penalties or interest, and any overdue income tax is not preferential. Like any unpaid creditor, the IRD could force a business into liquidation if debts remain unpaid. PAYE has a special status as this tax type is held on trust and is viewed as collected by the taxpayer on behalf of the IRD. Hence deliberately unpaid PAYE is the only tax where jail time can be imposed if not paid.
If you are behind with your tax payments, we strongly suggest that your first step is to create a robust cash flow forecast, ideally covering the next 12 months. This should enable you to assess whether the financial position is likely to improve, or whether you need to take further action to address the problem.
There are a number of forecasting and budgeting tools that can help. Spotlight Forecasting and Modano are two examples of software that we use when helping clients in this area. The key is to produce an integrated forecast cash flow, balance sheet and profit and loss account. By preparing 3-way financial statements, you are less likely to miss important items. The output should help you decide whether you are likely to need to organise further funding, or scale back operations to address the lack of cash. It also provides a monthly plan for the repayment of any outstanding principal amounts.
In meeting the costs of forecasting, it’s worth noting that if you have less than 50 employees, you may be eligible for NZTE Capability Development Vouchers, to use as partial payment towards the cost of training for business planning and managing resources. The co-funding is up to 50% of capability development training, up to a maximum of $5,000 per year per business.
Once you have assessed the bigger picture, review whether the forecast cash flow issues appear to be temporary or permanent. If the latter, we suggest talking to business recovery experts to determine what options are available to you, such as restructuring, refinancing, a creditor compromise, receivership or liquidation.
For temporary cash flow deficits, consider negotiating a bank overdraft. The financial forecasts that you have prepared should help to support your application, and show how the overdraft will be repaid over time.
Other measures which can provide temporary relief include using tax financing for income tax payments and negotiating payment plans with the IRD for historic GST and income tax. In most circumstances, the IRD would expect PAYE to be paid up to date and for the payment of current taxes to be made on time.
There are several companies offering tax financing services, acting as tax intermediaries between businesses and the IRD. Your advisor can obtain quotes and organise the tax financing for you.
Tax financing can be helpful for businesses undergoing change, to assist with upcoming payments which the taxpayer is unable to meet. When tax financing is undertaken, the tax intermediary sets aside an agreed amount in a ‘tax pool’, as at the date of the arrangement. The business pays interest on this amount until cash flows enable full payment, at which point the backdated principal amount (held at the date on which the financing plan was initiated) is transferred to the IRD. This clears any use of money interest and penalties imposed by the IRD, so the only cost to the business is the tax financing rate. There is no security taken by tax financing intermediaries.
The IRD use of money interest rate is currently 8.22% on underpayments. Compared to this, the indicative tax financing rate is from 4.4% at the time of writing. In contrast to other borrowing rates, such as a business overdraft, the tax financing rate offers a highly competitive way of smoothing out tax cash flows.
Use of money interest is still charged on overdue tax amounts under an arrangement plan. Therefore, given the above interest rates, while a payment plan is beneficial for tax-payers with historical tax liabilities, it would be more beneficial for a taxpayer unable to meet upcoming payments to negotiate tax financing with an intermediary.
It is possible to request payment plans for overdue GST and income tax payments, and the main option available is an instalment arrangement, whereby an agreed amount is repaid over a set period of time. To initiate this, the taxpayer needs to provide the IRD with an instalment arrangement proposal. The aim of this proposal should be to pay off the outstanding tax in the shortest possible time, while keeping current tax obligations up to date (particularly those relating to PAYE and GST).
An agreed arrangement plan needs to be adhered to in order to avoid reputational issue with the IRD and increased penalties. This is where a robust cash flow forecast and fore-cast financial statements could assist in ensuring the arrangement plan is realistic given the taxpayer’s cash flows.
Do be aware that, as discussed above, use of money inter-est is still charged during an arrangement period. The benefits of a payment plan arise from reduced penalties and avoiding any further debt collection action from the IRD. We suggest working with your advisor on negotiating with the IRD, as it may provide more confidence in your ability to deliver.
The most valuable advice that we can give is to act promptly when cash flow issues start to arise. If you can quickly assess whether the issues are temporary or look to be longer term, and take action accordingly, you should be in a much better position to ensure a good outcome for you and your stakeholders.
DISCLAIMER No liability is assumed by Baker Tilly Staples Rodway for any losses suffered by any person relying directly or indirectly upon any article within this website. It is recommended that you consult your advisor before acting on this information.