Tax Pooling

 Key takeouts:

1. Paying uplift at P1 makes sense.
2. Paying uplift into a tax pool makes more sense - otherwise no credit interest.
3. Financing uplift will be a worthwhile consideration for many taxpayers.
Eight key things to be thinking about when advising your clients for P1

1. Is the nature of your client's business or the industry they're in volatile enough that they may end up overpaying their tax? If the answer to this is 'yes', and they intend to pay according to the uplift method, making their payment into a tax pool is the only way (under the new provisional tax rules) that they can earn credit interest on their overpaid amount. Depositing becomes a one way bet.

2. If the year has started well, why would you advise them to pay more than uplift? Under the new provisional tax rules, if a client has paid uplift at all installment dates, any additional tax only needs to be paid at P3. The days of needing RIT spread evenly across each provisional date are over (assuming uplift is followed). Therefore, unless doing it for cash management reasons, there's no argument for paying more than uplift at P1.

3. If your client can't pay uplift, why not finance uplift so they still benefit from the provisional tax changes? Unfortunately the provisional tax changes don't do anything to help with the timing of payments - your client only receives the benefit of the changes if they can make their uplift payments. Thankfully, there's another way to address this - through tax finance. By financing your client's uplift payment you still ensure they won't be exposed to UOMI before P3, but your client can pay their tax when it suits them.

4. Would your client benefit from maintaining their cash in the business rather than paying their provisional tax? There are plenty of good business reasons why tax finance is a great option - paying down more costly debt, achieving a better return on capital, or simply keeping some headroom in their overdraft. Tax finance is available for 1-12 months, with rates currently starting from 3.79%. No security required.

5. Does your client have any associated parties with tax to pay at P1? If they do, make sure they all follow the same method. The new provisional tax rules state that if all associated parties don't follow the uplift method they will all become liable for UOMI from P1. Associated parties are wholly owned groups and (non-corporate) shareholders who own 50% or more of the corporate.

6. Is estimating more suitable based on your client's projections this year? Despite the friendly nature of the tax pooling changes, the benefit relies on paying uplift. This won't suit taxpayers of all growth profiles. For some, particularly those where growth is flat or declining, tying up that much money in the tax system is not the best use of capital.

7. Is there a new taxpayer in the group? IRD hasn't articulated whether the provisional tax associate rules would be met in this scenario or whether the group is shifted into the estimation regime. We would hope that they're met, but it would be worth trying to clarify this with IRD if you have a client in this situation.

8. Is now the time to discuss depositing into the Tax Traders tax pool with your client? The reasons for depositing into a pool are many and varied. Whether it be the ability to get quick refunds if required, the ability to manage transfers more easily for groups, or the ability to move payments around to reduce UOMI exposure. But this year, with it being the only way to earn credit interest on over payments, the case is even stronger. These next three weeks might be the perfect time to discuss this with your client. You may find the following brochure helpful but please contact us if we can assist further.