You may be wondering if, why, and when the IRD charges interest and penalties. Well, they do have a method to what appears to be madness!
Late filing penalties
Penalties paid to the IRD cannot be claimed as business expenses.
Penalties can be charged on all tax types except Student Loans. The penalty will range between $50 and $250 depending on particular circumstances. If you’re going to incur a penalty, this is probably the best type – the amounts are relatively small and you can only be charged once!
Late payment penalties
Inland Revenue will charge late payment penalties for any tax unpaid on the due date. The penalty can be charged from the day after the due date, and will accumulate over time.
Ways to avoid penalties
- Pay tax on time
- Enter into a payment plan with Inland Revenue to pay the debt – you’ll be charged an initial 1%, but if you stick to the arrangement, no further penalties will be incurred
- Use tax pooling
Interest
Unpaid taxes incur interest from the date after the due date. Revenue can charge interest. This interest is tax-deductible.
Inland Revenue charges interest because you have used them like a bank. Paying tax on time may bring you into a bank overdraft, increase your overdraft, or force you to get a loan. All of these incur interest, usually at high rates. You’re therefore paying interest to Inland Revenue, rather than to your bank.
Reversing interest and penalties
A common and hopeful plea we hear is “can you get the IRD to reverse interest and penalties?”
Interest
Interest is a normal part of business when you borrow or use money from others. In not paying tax on time, you’re effectively borrowing from Inland RevenueIf Inland Revenue didn’t charge interest, there would be nothing stopping you from putting that money into a term deposit and earning interest.
Penalties
Penalties are difficult to get remitted.
If it’s your first time with a late payment or late filing, the IRD may give you a grace period and a little more time before they penalise you, or they may issue the penalty and reverse later upon request. They’ll send you a letter stating this.
The IRD has little patience and sympathy with consistently late taxpayers and asking is usually a lost cause. If there’s a good reason, they’ll consider it, but only once the core tax has been paid in full. This was particularly the case with the impact of Covid, but as more and more businesses are getting back to normal, it’s not a given.
You can stop the late payment penalties if the IRD agrees to an instalment arrangement. They’ll still charge interest though.
We can apply for an instalment arrangement on behalf of our clients.
Summary
If your business has late-paying customers, you become frustrated and try to resolve the problem. Options include requiring a deposit up-front and/or charging interest and penalties. Many businesses prepare a cashflow forecast, which generally assumes customers pay on time. If they don’t, the month-end cash position is lower than expected. This impacts overdraft interest, and makes you think twice about purchasing that new piece of equipment.
Inland Revenue is in a similar position. We’re its customers. It has forecasts with income (from taxpayers) and expenses (various government departments – social housing, health care, schooling, etc).
The short answer as to why Inland Revenue charges interest and penalties – it’s a business.
Back to top[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][us_separator size=”small” show_line=”1″ thick=”4″][vc_column_text]Beany doesn’t work for Inland Revenue – we work for you. We use our best experience, judgement and training to interpret accounting and tax legislation to enable you, the taxpayer, to pay the least amount of tax legally possible.
How Far Do We Go? Tax Minimisation vs Tax Avoidance[/vc_column_text][/vc_column][/vc_row]
