Demand is growing for a service known as tax financing as economic conditions make it harder for businesses to meet their tax requirements.

There are now a handful of companies offering assistance to businesses having trouble paying their provisional tax bills, or who have under- or overestimated their tax payments. All report an upswing in business.

As banks tighten lending, these services offer an alternative source of working capital to companies needing cash to tide them over.

The interest rates are competitive. Whereas Inland Revenue will charge companies 9.73 per cent on late payments, tax finance agents are offering rates of between 6 per cent and 7.5 per cent.

There are two forms of help - tax finance and tax pooling.

Kerry Brew, director of Provisional Tax Finance, which was set up about two years ago, said tax finance was the topical one because sources of funding had become so scarce. "This is a way of getting really good value for money working capital into their business."

Tax financiers did not take any security or do credit checks, and were able to offer such good interest rates because of the way the system was set up with Inland Revenue.

They got funding in order to pay their clients' tax bills for them. But if clients then failed to meet their obligations, the IRD still repaid the tax financier and assumed the responsibility of chasing the unpaid tax and subsequent penalties.

"The way our funders look at [it] is as if they had a deposit with the Crown, rather than a risky underlying SME portfolio," Brew said.

Ian Kuperus, managing director of Tax Management New Zealand, which was set up five years ago when the IRD first allowed the system, said companies of all sizes made use of it. "We have a commitment to make sure our services are accessible to the smallest of companies."

Companies typically financed for 12 months.

Brew also said tax financing was being used across the board. "We're finding that we've been financing from self-employed plumbers right through to household names."

Electronic Tax Exchange, set up 18 months ago, offers only the second type of tax help, tax pooling. General manager of business systems Anaru Timutimu said they had noticed a considerable increase in demand in the past three to four months.

ETX and its competitors are IRD-approved tax pooling intermediaries. They buy credits from companies that have overpaid their provisional tax, paying them an interest rate of around 6 per cent, which is higher than the 4 per cent they would get from the IRD until the refund was made.

On the other side, they offer credits to companies which have underestimated their provisional tax, charging them around 7.5 per cent.

Ben Ridler, managing director of business coaching network The Results Group, said tax financing or pooling was a great idea, as there was "pretty well no capital anywhere else".

The danger was that if taxpayers missed payments once they had an arrangement with a tax financier, they would be hit with penalties. "So be very confident in your ability to ... make all the payments and clear it all up on time."

Ernst & Young tax partner Jo Doolan said it was a good option to consider, but New Zealand companies could be quite lazy in assessing the tax they had to pay and there might be other ways to reduce their bills. In her experience the IRD was helpful in this regard.

On the web
* Tax Management New Zealand - www.tmnz.co.nz
* Provisional Tax Finance - www.taxfinance.co.nz
* Electronic Tax Exchange - www.etx.co.nz