Tax advances

What it means

Tax advances are instalments of corporate income tax paid during the tax period. Their size derives from the previous period’s tax, not from the result the company is achieving right now.

Depending on the last known liability they are paid quarterly, monthly, or not at all. After the return is filed the advances paid are credited and the difference settled.

Tax advances should not be confused with payroll tax advances. Here the company or sole trader prepays its own tax on its own profit; with payroll, the employer withholds tax from employees and pays it over on their behalf. Both go to the tax office, but they are tracked separately in the books and on the taxpayer’s account.

How it works in practice

Advances belong in the cash flow plan as a fixed item with specific dates. A newly formed company usually owes none in its first year, which makes the second year an unpleasant surprise when tax and advances fall due together.

Where results deteriorate materially, the tax administrator can be asked to set the advances differently from the statutory rule. The request is supported with figures, not expectations.

Once the return is filed we calculate the new advances and send the client a schedule with dates and payment details. Many companies set up a standing order for them, but it has to be changed after every new return, or the bank keeps sending the old amount and the gap only shows at the next settlement.

What to watch out for

Not paying advances is a default with its own interest, even if the year ends in a loss and the advances come back. A change in the last known liability after filing changes their size too - and that recalculation is easy to miss.

An advance paid with the wrong payment details can be allocated to a different tax or sit as an unmatched payment. On the taxpayer’s tax account it then looks unpaid, and the company ends up answering a notice although the money left on time. A regular look at the account catches the error before it grows.