As a new Non-Individual (Company or Trust) business you could have to pay Use of Money Interest to IRD?
A new business (Company or Trust) is one of the categories of taxpayers that may be liable for interest even if they have no provisional tax liability in their first year of operation.
You may have to pay Use of Money Interest (UOMI), if the Residual Income Tax (RIT) is greater than $2,500. Note: RIT is the amount of tax you have to pay, less any tax credits you may be entitled to (excluding working for families’ tax credits or other tax payments made during the year) and any PAYE deducted.
In the first year of operation of a business there is normally no Provisional Tax Due. This is because Provisional Tax is based on the RIT (tax to pay) on the last income tax return when it is more than $2,500. Therefore because this is the first year of operation the tax liability is often overlooked and a Company or Trust ends up with UOMI to pay.
How is the actual amount of Use of Money Interest calculated?
Use of Money Interest rates are set by the Inland Revenue Department. They are set at a level which is intended to discourage taxpayers from using the IRD like a bank. At the moment the rate at which you pay Use of Money Interest is 8.40%. The rate at which you receive it (if you overpay your tax and you are in the above category) is 1.75%.
If you are late paying your taxes you will incur a UOMI charge until the account is clear. Even if you enter into an arrangement to pay off your taxes over time you still have to pay the interest (in these cases you will often be able to avoid any further penalties).
In all other cases the calculation of the interest is a little complicated and an example is probably the best way to demonstrate it:
Let’s assume a Company has an Income Tax Liability (Residual Tax) of $45,000. Being the first year in business there has been no tax paid. We will calculate the interest up until 30th June (being 3 months after balance date).
Provisional Tax Instalment Date
1/3 of Residual Tax
No. of Days
Charge to 30TH June following Balance Date
Although the terminal tax (in this example a shortfall of $45,000) isn’t due to be paid until 7 April, of the year after it is incurred, the UOMI continues to accrue until the tax is paid. So if the above tax was paid on 30 Jun a total of $1,815.78 interest would be payable. Interest continues to run at the rate of $10.36 per day until the tax is paid.
The calculation formula does not take into account any seasonal variations that occur in your business income cycle. For example, if you make most of your money in the latter part of the year, it will make no difference to the calculations. IRD will assume that your income was earned evenly throughout the year.
In the next Financial Year not only are the current years RIT plus UOMI payable but also the next years Provisional Tax of $47,250 (payable in three instalments of $15,750.00 each). As can be appreciated this places a tremendous strain on the business finances and why a lot of businesses hit the wall financially speaking.
Minimising Use of Money Interest
Where you are likely to fall into the Interest regime, it may be advisable, as we encourage our clients to do, to make voluntary payments of provisional tax as you go. It is likely that you will find it cheaper to finance your tax payments through your trading bank.
We also strongly recommend that you gain access to a good computer package that is capable of producing reliable and regular management reports, so that you are able to see your income unfolding as the year progresses. We use Xero which in our opinion is an excellent computer package. You may wish to take responsibility for the completion of those reports yourself, or as our clients do, get us to complete them for them.
In any event, the importance of regular tax planning is self- evident.
- Prepare a tax plan so that you are better informed,
- If your income circumstances change, there will be provisional tax consequences,
- Gain access to a good accounting package,
- We also have found that using the Profit First Methodology excellent for putting funds aside so that when it is time to pay tax the funds are there.
Thank you for taking the time to read this. I trust that the above has been informative and if there is any aspect that you wish to discuss further please contact us.
Disclaimer: This publication has been carefully prepared, but it has been written in general terms only. The publication should not be relied upon to provide specific information without also obtaining appropriate professional advice after detailed examination of your particular situation.