Options if you can’t pay income tax liabilities from cashflow

by Kieran Coughlan

The income tax return deadline for year 2016 has passed, since Tuesday last.

Taxpayers who pay and file online are granted an extension until Thursday, November 16, 2017.

The original pay and file deadline of November 14 was extended by two days, to compensate for disruptions to business as a result of Storm Ophelia.

The extended pay and file deadlines are, at the risk of over-stressing the point, only available to taxpayers where their tax return is filed electronically, online, and where payments are also made online.

Over recent years, the range of payment methods online has improved, meaning that tax liabilities can be paid by single direct debit (SEPA), or by card, although the latter form of payment results in an administrative surcharge of 1.1% applied by Revenue in the case of credit cards, but with no surcharge applied by Revenue for debit card usage.

Where payments to settle the liabilities for 2016 are not made by November 16, automatic surcharges will apply to the return.

In the case of income tax returns, the penalty regime is 5% of the liability, if the liability is settled within a two- month period.

Revenue can also impose interest at approximately 8%, on the late payment of tax.

When a taxpayer expects not to be in a position to meet their liability, there is little point in the proverbial sticking of one’s head in the sand.

The liabilities to Revenue can stack up, and are seldom lifted, but more importantly, Revenue have a raft of powers for collection and imposition of pressure, including the ability to appoint a debt to a sheriff for collection; the collection of debt from third parties; prosecution; publication; and imposition of penalties.

With that in mind, and with a view to limiting exposure to late filing penalties, some tax payers may wish to consider financing their tax bill through their bank.

Some of the major banking institutions are offering this facility, with most offering customers 11 months to pay back their liability.

Generally, the interest rates offered by banks for these products are relatively competitive, typically costing less than the average unsecured business overdraft rates, and below the late interest rate of 8% applied by Revenue.

The advantage of leasing one’s tax liability is essentially wrapped into the avoidance of Revenue’s penalty regime.

For example, at this point, a tax payer would face at least a 5% penalty where they are not in a position to meet their liability.

Of course, if you can afford to pay your liability in the first place, then there is little merit in going down the route of financing it.

On a more fundamental point, if a taxpayer is not able to meet their liability for 2016 from cash flow, then they should give serious reflection as to why that is the case.

As the saying goes, there are two certainties in life, death and taxes.

The inability to meet one’s tax liability from cashflow can be indicative of a more serious ailment, such as being over-borrowed, or perhaps even an overloading of short-term debt, insufficient business profits, poor debtor management, or drawings disproportionate to the underlying level of business profits.

While there is no pleasure in communicating this type of diagnosis, ultimately a tax payer is possibly best served with a blunt dose of reality; by doing so, one is hopeful they may be jolted into taking action to protect themselves from one of those two certainties in life.

All too often, accounts are prepared, only to be cast aside without much consideration, analysis or even reflection as to how the business can be improved.

A legitimate question often asked at this time of year is what can be done to reduce future tax liabilities.

It is difficult to spend one’s way out of tax bills.

Engaging in a spending spree to bring down one’s tax bill will at best result in a tax saving of about 50% for the self-employed who pay tax at the high rate, or about 30% for a self-employed person paying tax at the low rate.

For farmers in averaging, or for farmers who spend on assets, the tax savings can be miniscule, as profits are averaged over five years, and allowances granted over eight years.

The key point here is that spending a chunk of money might have a lot less impact on your coming year’s tax liability than you think.

With that in mind, now is a good time to plan a meeting with your adviser (preferably after the filing deadline date for 2016!) to crunch the numbers for year 2017 and budget ahead for 2018 and beyond.

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