What is Provisional Tax and Should You Pay ‘As You Go’ in the AIM scheme?
Provisional tax is the tax that business owners pay for the current year of trading – it’s a bit like PAYE for business. Instead of paying weekly out of our pay packet, we pay every 4 months, based on the last set of financial statements. It can really catch new business owners out as they can be paying for last year and this year in the same time period.
From 1st April 2018, business owners have had the option to enter the AIM regime (accounting income method). In the first year of this, very few business owners took up the option (approximately 2% of business owners) and we are now in the second year – and the IRD are promoting this option vigorously to all tax payers.
So what does it mean and should you consider it?
It is intended to spread payments of provisional tax over the course of the year.
Potentially, this could ease the cash flow challenge that three up-front lump sums present for many small business owners.
In theory, any business which uses approved software (for example, Xero) can pay their provisional tax at the same time as their GST, every two months.
There’s also a big apparent benefit for seasonal businesses. If you over-pay in one period due to good trading and then your turnover drops in the next, you can get a refund of the overpaid provisional tax, just like a GST refund.
The key issue is making sure that your Xero file is:
- Fully up to date and reconciled
- Any adjustments affecting your tax profit have been done – this is the tricky one. To ensure you have all your tax adjustments done means you have to adjust for the following:
- Personal use adjustments like use of home as office, your car expenses and any other expenses that would normally be fixed up at the year end.
- Stock count and monthly adjustments
- Shareholder salaries
- Debtors and creditors need to be included and up to date
If your file is not complete and accurate, you may face either an overpayment of tax (the most likely scenario) or an underpayment of tax.
As a consequence of the complexity, the IRD is forcing business owners to file through their accountant – you cannot file directly from your accounting software. At this stage we are estimating just over an hour to file each return and are charging $100 per month to file your AIM return. When we’ve done a few, we hope to be able to revise this downwards – but right now we will be preparing almost a mini year end so that we file the correct amount on your behalf.
The good news is:
- That the IRD will not penalise you if you do under-pay as long as it agrees with your Xero file (or similar)
- If you over-pay, they will refund with your next return!
This is great.
The bad news is:
- That you have to pay provisional tax every two months instead of 4 months
- If you over-pay, there will be no interest credited to you
- Every return requires a statement of activity reflecting your profit and loss (not your cash flow)
- If you fall out of the regime during the year and don’t file, the IRD will charge interest on any short paid tax
- You cannot use tax pooling
- If you file a statement of activity but don’t pay the tax, you will be charged interest and penalties
Read more about the changes to the provisional tax system.
We are now starting to do more AIM returns so please discuss this with your accountant if you’re interested or contact us at firstname.lastname@example.org with any queries.