New Provisional Tax Calculation Method - Accounting Income Method (AIM)

From 1 April 2018, a business with less than $5m annual turnover can use the accounting income method (AIM) to calculate its provisional tax liability.AIM will be provided through approved accounting software (e.g. Xero and MYOB).The software calculates the provisional tax payments based on the current years accounting information, not the previous years profit like the standard uplift provisional tax method.The main benefits of the AIM method are that there is no Inland Revenue use of money interest (UOMI) for underpayments of tax and the business pays tax based on more up-to-date information.

There has been a lot of marketing around the use of AIM from Inland Revenue and accounting software providers.They have been selling this method as the next best thing.Generally however, McIntyre Dick & Partners will not be recommending the AIM method for clients, unless there are exceptional circumstances.

As stated above, one of the benefits of AIM is that there is no UOMI payable on underpayments of provisional tax.However, this benefit has been largely negated by the recent changes to UOMI and provisional tax, as outlined in our September 2017 edition of Topical Taxes, which take many taxpayers largely out of the UOMI regime anyway.

In our opinion the AIM method is not as simple as it is made out to be. Whilst the software calculates the net profit for the year, Inland Revenue still requires adjustments to be made to this figure, for example:

  • private use expenditure
  • depreciation
  • trading stock/livestock on hand
  • prior year losses
  • provisions
  • debtors and creditors
  • shareholder salaries

Inland Revenue is still to release guidelines on when and how the above adjustments are to be made.

In theory, the AIM Method makes sense, as you are paying provisional tax in line with expected profits for the year.However, due to the adjustments that are required to the figures in the taxpayers accounts, it is likely this method will take more time to calculate and result in additional compliance costs compared to using the standard uplift method.

Please contact us if you have any questions or wish to discuss the AIM method further.

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