Provisional Tax – Use of Money Interest Change

Provisional Tax – Use of Money Interest Change

Provisional tax changes relating to Use of Money Interest (UOMI) were announced around a year ago to take effect from 2018.

This was very good news, especially for those clients who don’t complete their annual accounts and tax returns until after the first provisional tax payment is due for the next year. This payment falls on 28 August for most clients.

In the past, Use of Money Interest could be applied if you ‘underpaid’ your first provisional tax payment. This meant a certain amount of crystal ball gazing from clients.

For those clients who residual income tax of less than $60,000 to pay, they are protected under new Safe Harbour provisions. This means that any UOMI charges won’t be applied until after their terminal tax date.

There is an important caveat here. Your two provisional tax payments that fall due on 28 August and 15 January must be made using the standard uplift method. Payments must be made on time. If you don’t do this, they are deemed by Inland Revenue to be “failed instalments” UOMI applies.

What is the Standard Uplift Method?

For nearly all clients this is the method you are already using. We work out your income tax for the year that’s been, add another 5% onto that figure, and divide it into three equal instalments. Those payments for most clients fall on 28 August, 15 January and 7 May.

If the income tax return for the preceding tax year has not been filed (a fairly common occurrence), by the time a provisional tax payment is due then the tax payable is based on 110% of the residual income tax for the year before the preceding tax year.

Our View

We welcome the changes to UOMI. Previously businesses needed to use a crystal ball to predict their profit for the year. The changes now give companies some respite. It also means that clients who have not completed a tax return by the end of August are protected by UOMI, so long as they pay their standard uplift provisional tax on time.

This article is general in it’s application and does not constitute tax advice. No assurance is given as to its completeness or accuracy. Generate Accounting is not liable in any way to you or anyone else for any decision made or action taken in reliance on the information. Before making any tax decision, you should consult an advisor.