Tax bills! As we reach the end of the 2016/2017 financial year and tax positions become apparent, we think this is an uncomfortable, yet important, topic to write about.
It can be emotionally stressful when you feel you are unable to meet your tax payment obligations, so this article aims to make taxpayers aware of the Inland Revenue processes around tax arrears and debt collection, and the ways you can help yourself to mitigate the negative consequences of ignoring overdue taxes.
First of all, it pays to remember that it is Inland Revenue's job to collect taxes. In order to do their job effectively they need to ensure they are keeping on top of all taxes due to them, and where there are outstanding payments they have been stepping up their debt collection processes over recent years. Their current processes mean debts can no longer "slip under the radar", and all tax payers, big and small, are subject to these same debt follow-up procedures.
However Inland Revenue also aim to be fair - if you suffer from extenuating circumstances which affect your ability to meet tax obligations, Inland Revenue have a few ways in which they can try and help you:
they may agree to defer the tax payment until you've recovered from your situation
they may accept a payment arrangement over a period of time
or in some circumstances, they may write off some, or all, of the debt
What are Inland Revenue's debt collection processes?
Here's what you can expect if you fail to pay your tax on the due date:
As soon as you miss a tax payment Inland Revenue will start charging penalties and interest on the outstanding amount.
At present they charge a 5% penalty if the tax is outstanding for one week. They will then charge a 1% penalty for every month the tax remains outstanding (for late payments first arising after 1 April 2017, the 1-month incremental late payment penalty will no longer be applied on GST, income tax and Working for Families Tax Credits). The penalty is calculated on both the principal outstanding tax amount, as well as the previous penalties that have been charged. These compounded charges can mount up very quickly!
Inland Revenue currently charge interest at a rate of 8.27% per annum, however this will reduce to 8.22% p.a. on 8 May 2017. The interest accumulates daily on the outstanding tax.
Once a tax payment becomes overdue, Inland Revenue will send you a letter advising you of the missed payment, and request for you to pay it.
If you do not take any action (ie, make no efforts to contact Inland Revenue or pay the outstanding amount), Inland Revenue will send a follow-up letter urging you to make payment.
If you ignore this letter, it is likely the next letter you will receive from them will advise you that they will take the tax owed directly from your bank account. Yes, Inland Revenue have the power to take money from your bank account!
Moreover, upcoming changes to Inland Revenue's processes mean anyone who is not complying with meeting their tax obligations can now also have their credit rating negatively impacted!
What can you do about it?
The good news is that you do have options!
You can contact Inland Revenue and propose a payment plan - if they agree to an instalment arrangement for your outstanding tax, monthly penalties are supressed. In addition, if you contact Inland Revenue for an instalment arrangement before the tax becomes due, even more penalties are supressed. Interest is still charged, but your credit rating will not be affected
Interest rates charged by Inland Revenue are generally a lot higher than bank interest rates. Therefore it is usually better to take out a bank loan to pay your tax arrears - you will still be charged interest by the bank, however you will end up paying less overall
Tax pooling is a way to 'buy' and 'sell' tax with other tax payers. You may be able to 'purchase' tax available on the due date, which means Inland Revenue will get their money on time. You may still be charged interest, but these rates are generally a lot lower than what Inland Revenue charges
What Inland Revenue look at when considering a payment plan
They will look into the circumstances behind why you cannot pay the tax owed, and that these reasons are legitimate, such as an accident or emergency, or something beyond your control
Whether you can afford to fund the tax in some other way (eg, if you have assets which can provide security on a loan) – Inland Revenue prefer you to finance your tax debt elsewhere
Whether you have kept up-to-date with filing obligations. Inland Revenue will refuse to agree to a payment plan if you have outstanding returns. In other words, they want you to be compliant!
Whether your instalment amount offer is reasonable. Generally if the outstanding tax would be paid off in less than a year it is acceptable. If the outstanding tax were to be paid off over a longer period, more evidence of your inability to pay may be required
Whether you have adhered to the terms of any previous payment plans. If you haven't complied with previous instalment arrangements, it is unlikely Inland Revenue will accept another one. If you cannot meet an instalment payment, they want you to contact them as soon as possible.
Talk to us! We act for you, not Inland Revenue. We know how Inland Revenue processes work so we can recommend the best course of action for your situation. We can review your financial position, assist you when dealing with Inland Revenue in coming to a payment arrangement or tax write-off, make arguments on your behalf, and suggest improvements that you can make to help your situation.
We encourage you to contact us as soon as possible if you are concerned about your tax bills - it's our job is to help you reduce your tax, and your stress.